In 2011, as the House of Representatives held the debt ceiling hostage, international observers unloaded on the United States. “The value of [our] investments, the value of our oil earnings, and the value of our currency are all under threat as politicians in Washington grandstand for their constituents,” wrote Saudi Arabia’s Arab News. The Globe and Mail, a major Canadian newspaper, declared that an American default “would be catastrophic, not just for Americans, but for all those who depend on U.S. stability and leadership.” The Age, a prominent Australian daily, wrote that “economic barbarians have taken Congress hostage, and U.S. and global markets with it.”
America’s adversaries were even harsher. China Daily, an English-language newspaper controlled by the Chinese Communist Party, published a cartoon that showed a snowball named “U.S. debt” about to run over the planet. China’s state-run Xinhua news agency wrote that the world had been “kidnapped” by U.S. politics. Russian President Vladimir Putin remarked that Americans were “living like parasites off the global economy and their monopoly of the dollar.” No one (aside from some Republicans) appeared to be having fun.
The U.S., of course, avoided default. Just hours before the Treasury was due to hit its borrowing limit, President Barack Obama agreed to massive spending cuts in exchange for a debt ceiling hike. Standard & Poor’s downgraded America’s credit rating for the first time in history and rattled financial markets recovered. Other countries, though shaken, could breathe.
But now, the threat has returned with Republicans regaining control of the House of Representatives. A dangerous showdown isn’t guaranteed: Speaker Kevin McCarthy has said he is unwilling to allow a default, and Senate Minority Leader Mitch McConnell has echoed the sentiment. Yet McCarthy won the speakership, in part, by promising to hold the debt ceiling for ransom. And other members of the House Republican Conference are obviously ready to get aggressive. House Ways and Means Committee Chairman Jason Smith says the debt limit is “clearly one of those tools that Republicans” will use to force major spending cuts. “I’m a no, no matter what,” insisted Representative Tim Burchett when asked if he would vote to raise the cap.
For Republicans, a game of debt-limit chicken has political benefits. GOP proposals to cut government spending are unpopular, but the debt ceiling is an opportunity to make a Democratic president sign on to them. If the brinksmanship results in market chaos, that, too, might help the GOP since voters tend to blame the incumbent president’s party when the economy suffers.
But internationally, a default would be disastrous, particularly if it results in a financial crisis. It could make it harder for Europe to continue working with the U.S. to support Ukraine and undermine Washington’s capacity to sanction Iran and Russia. It could not only cause economic havoc in the short run but also eventually lead to a new world financial order, one no longer reliant on the dollar as its reserve currency—a change that would make it harder for Washington to exert global influence.
A default would mean “Washington’s domestic politics are in such a mess that its legislators hardly give weight to their country’s international reputation,” said Paul Tucker, the deputy governor of the United Kingdom’s central bank from 2009 to 2013 and a former member of the G20’s Financial Stability Board. Tucker described defaulting as a gift to U.S. adversaries. “‘Vote default, vote Beijing,’ might be the motto,” he said.
Experts say that even if the U.S. does not default, a protracted standoff over the debt ceiling could damage Washington’s influence. So could a solution that involves massive spending cuts. Both scenarios would chip away at America’s capacity to lead during great power conflict. Default or austerity would make allies wonder whether Washington is reliable, just as America needs partners as a bulwark against Russia, China, and the world’s other ambitious autocracies.
In 246 years, the United States has never defaulted, so it is difficult to precisely predict the consequences if it did. But it would almost assuredly be disastrous. “The U.S. in disarray, default, and possibly with a financial crisis on its hands is likely to get less of what it wants on the world stage,” said Jonathan Kirshner, a professor of political science at Boston College who researches international economics. Helen Thompson, a professor of political economy at the University of Cambridge, agrees: “You’d have to say some really bad things could happen.”
The curtailment of U.S. power would depend on how long the default lasts and on whom the federal government chooses to keep paying when it can no longer borrow. A short-lived default, in which Congress and the President agree to a solution within hours or a few days, may not send the market stumbling or trigger a recession.
In a Hobson’s choice, Washington could keep the markets happy by servicing its debt instead of paying civil servants and senior citizens. But the American public would go ballistic, and the Biden administration has balked at stiffing Americans to protect bondholders. So, it is possible that international markets could reel from default. “You could expect that financial market panic would spread through the world economy,” said Thompson.
If a default triggers a global financial crisis, as it easily could, it will become much harder for Washington to keep its allies arrayed against Moscow. The Ukraine war and the resulting sanctions on Moscow have already put European states under tremendous economic pressure.
In the long term, a default-driven financial crisis could undermine the dollar, a key instrument of American power. As the global reserve currency, the dollar allows Washington to spend freely because many nations, institutional investors, and individuals park their cash in U.S. Treasury instruments such as bonds, notes, and T-bills. If a shaken world watched Washington default on the “full faith and credit” of the United States, they would likely be reluctant to buy our debt and might even unload much of what they have, sending U.S. borrowing costs skyrocketing.
Moreover, the dollar is the key to the global financial system and to international transactions, and its dominance allows the United States to issue impactful sanctions unilaterally. This is a power used by all recent presidents, including Republicans. It is unlikely, for instance, that Trump’s economic campaign against Iran would have dealt so much damage if Tehran could efficiently deal in pesos, rubles, or drachmas.
A default would create “the question, among others, of whether the dollar is truly safe,” Tucker said. U.S. rivals, he told me, would “roam the world arguing to sovereign asset managers and others that they should trim the proportion of their portfolios allocated to dollar-denominated assets.” Brad Setser, a former senior advisor to the United States Trade Representative, added: “Efforts to move away from the dollar would accelerate. No question.”
Even an extended showdown that does not end in default will have negative consequences. “It reinforces a narrative in Europe and probably China and some other Asian countries as well that American policy is just dysfunctional,” said Thompson. Such a moment would come just as Washington had succeeded in digging itself out of the post-Trump international malaise. Biden’s message—“America is back”—is a harder sell when Washington teeters on the verge of bankruptcy.
The wrong kind of debt ceiling settlement could also compromise U.S. authority—especially if the White House and Congress return to the strict discretionary budget caps adopted in 2011 when the Obama-Biden administration presided over a $1 trillion cut in defense. There’s no reason to think a 2023 repeat would be less severe. “There is likely less money for a range of U.S. policy priorities that impact the world,” Setser said, sketching out the consequences of a renewed sequester. “Less money for defense spending, less money, conceivably, for Ukraine, less money to back global investments in green technologies. Take your pick.”
Indeed, a 2023 Budget Control Act could be even worse in its effects than the 2011 model. Many Republicans are calling for defense cuts, which almost none wanted in 2011. Much of the House GOP conference is clamoring for reductions in aid to Ukraine, too—all at a moment of heightened international competition. “There was not so obviously a rival superpower in 2011,” said Tucker. “Now there is.”
It is unclear what Democrats can do to break this Republican logjam. So far, they’re waiting out the GOP in hopes that Republicans will receive such intense pressure from businesses, voters, and donors that they come to their senses.
If the White House and Treasury resort to unprecedented actions to keep borrowing—minting a trillion-dollar coin or following the analysis of legal scholar Garrett Epps and declaring that the 14th Amendment means the debt ceiling is unconstitutional—most of the analysts I spoke with believe the wider world would be fine with that. “I can’t imagine there being a particularly bad reaction to a particularly gimmicky or technical fix,” said Thompson. “If you look at it from within European politics and European countries, the whole idea of a debt ceiling looks odd.”
America’s allies, in other words, recognize the debt ceiling for what it is: a ridiculous problem. They might not mind an absurd fix.