How Damage from a US Debt Default Could Cascade Across the Global Economy 

The likeness of Benjamin Franklin is seen on US $100 bills, Thursday, July 14, 2022, in Marple Township, Pa. (AP)
The likeness of Benjamin Franklin is seen on US $100 bills, Thursday, July 14, 2022, in Marple Township, Pa. (AP)
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How Damage from a US Debt Default Could Cascade Across the Global Economy 

The likeness of Benjamin Franklin is seen on US $100 bills, Thursday, July 14, 2022, in Marple Township, Pa. (AP)
The likeness of Benjamin Franklin is seen on US $100 bills, Thursday, July 14, 2022, in Marple Township, Pa. (AP)

If the debt crisis roiling Washington were eventually to send the United States crashing into recession, America's economy would hardly sink alone.

The repercussions of a first-ever default on the federal debt would quickly reverberate around the world. Orders for Chinese factories that sell electronics to the United States could dry up. Swiss investors who own US Treasurys would suffer losses. Sri Lankan companies could no longer deploy dollars as an alternative to their own dodgy currency.

“No corner of the global economy will be spared” if the US government defaulted and the crisis weren't resolved quickly, said Mark Zandi, chief economist at Moody’s Analytics.

Zandi and two colleagues at Moody’s have concluded that even if the debt limit were breached for no more than week, the US economy would weaken so much, so fast, as to wipe out roughly1.5 million jobs.

And if a government default were to last much longer — well into the summer — the consequences would be far more dire, Zandi and his colleagues found in their analysis: US economic growth would sink, 7.8 million American jobs would vanish, borrowing rates would jump, the unemployment rate would soar from the current 3.4% to 8% and a stock-market plunge would erase $10 trillion in household wealth.

Of course, it might not come to that. The White House and House Republicans, seeking a breakthrough, concluded a round of debt-limit negotiations Sunday, with plans to resume talks Monday. The Republicans have threatened to let the government default on its debts by refusing to raise the statutory limit on what it can borrow unless President Joe Biden and the Democrats accept sharp spending cuts and other concessions.

Feeding the anxiety is the fact that so much financial activity hinges on confidence that America will always pay its financial obligations. Its debt, long viewed as an ultra-safe asset, is a foundation of global commerce, built on decades of trust in the United States. A default could shatter the $24 trillion market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.

“A debt default would be a cataclysmic event, with an unpredictable but probably dramatic fallout on US and global financial markets,” said Eswar Prasad, professor of trade policy at Cornell University and senior fellow at the Brookings Institution.

The threat has emerged just as the world economy is contending with a panoply of threats — from surging inflation and interest rates to the ongoing repercussions of Russia's invasion of Ukraine to the tightening grip of authoritarian regimes. On top of all that, many countries have grown skeptical of America’s outsize role in global finance.

In the past, American political leaders generally managed to step away from the brink and raise the debt limit before it was too late. Congress has raised, revised or extended the borrowing cap 78 times since 1960, most recently in 2021.

Yet the problem has worsened. Partisan divisions in Congress have widened while the debt has grown after years of rising spending and deep tax cuts. Treasury Secretary Janet Yellen has warned that the government could default as soon as June 1 if lawmakers don't raise or suspend the ceiling.

“If the trustworthiness of (Treasurys) would become impaired for any reason, it would send shockwaves through the system ... and have immense consequences for global growth,” said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund.

Treasurys are widely used as collateral for loans, as a buffer against bank losses, as a haven in times of high uncertainty and as a place for central banks to park foreign exchange reserves.

Given their perceived safety, the US government’s debts — Treasury bills, bonds and notes — carry a risk weighting of zero in international bank regulations. Foreign governments and private investors hold nearly $7.6 trillion of the debt — roughly 31% of the Treasurys in financial markets.

Because the dollar's dominance has made it the de facto global currency since World War II, it's relatively easy for the United States to borrow and finance an ever-growing pile of government debt.

But high demand for dollars also tends to make them more valuable than other currencies, and that imposes a cost: A strong dollar makes American goods pricier relative to their foreign rivals, leaving US exporters at a competitive disadvantage. That’s one reason why the United States has run trade deficits every year since 1975.

Of all the foreign exchange reserves held by the world’s central banks, US dollars account for 58%. No. 2 is the euro: 20%. China’s yuan makes up under 3%, according to the IMF.

Researchers at the Federal Reserve have calculated that from 1999 to 2019, 96% of trade in the Americas was invoiced in US dollars. So was 74% of trade in Asia. Elsewhere outside of Europe, where the euro dominates, dollars accounted for 79% of trade.

So reliable is America's currency that merchants in some unstable economies demand payment in dollars, instead of their own country’s currency. Consider Sri Lanka, battered by inflation and a dizzying drop in the local currency. Earlier this year, shippers refused to release 1,000 containers of urgently needed food unless they were paid in dollars. The shipments piled up at the docks in Colombo because the importers weren't able to obtain dollars to pay the suppliers.

“Without (dollars), we can’t do any transaction,” said Nihal Seneviratne, a spokesman for Essential Food Importers and Traders Association. “When we import, we have to use hard currency — mostly the US dollars.”

Likewise, many shops and restaurants in Lebanon, where inflation has raged and the currency has plunged, are demanding payment in dollars. In 2000, Ecuador responded to an economic crisis by replacing its own currency, the sucre, with dollars — a process called “dollarization” — and has stuck with it.

Even when a crisis originates in the United States, the dollar is invariably the go-to haven for investors. That's what happened in late 2008, when the collapse of the US real estate market toppled hundreds of banks and financial firms, including once-mighty Lehman Brothers: The dollar's value shot up.

“Even though we were the problem — we, the United States — there was still a flight to quality,” said Clay Lowery, who oversees research at the Institute of International Finance, a banking trade group. “The dollar is king.”

If the United States were to pierce the debt limit without resolving the dispute and the Treasury defaulted on its payments, Zandi suggests that the dollar would once again rise, at least initially, “because of the uncertainty and the fear. Global investors just wouldn’t know where to go except to where they always go when there’s a crisis and that’s to the United States.”

But the Treasury market would likely be paralyzed. Investors might shift money instead into US money market funds or the bonds of top-flight US corporations. Eventually, Zandi says, growing doubts would shrink the dollar's value and keep it down.

In a debt-ceiling crisis, Lowery, who was an assistant Treasury secretary during the 2008 crisis, imagines that the United States would continue to make interest payments to bondholders. And it would try to pay its other obligations — to contractors and retirees, for example — in the order that those bills became due and as money became available.

For bills that were due on June 3, for example, the government might pay on June 5. A bit of relief would come around June 15. That's when government revenue would pour in in as many taxpayers make estimated tax payments for the second quarter.

The government would likely be sued by those who weren’t getting paid — “anybody who lives off veterans’ benefits or Social Security,” Lowery said. And ratings agencies would likely downgrade US debt, even if the Treasury continued to pay interest to bondholders.

The dollar, though it remains dominant globally, has lost some ground in recent years as more banks, businesses and investors have turned to the euro and, to a lesser extent, China’s yuan. Other countries tend to resent how swings in the dollar's value can hurt their own currencies and economies.

A rising dollar can trigger crises abroad by drawing investment out of other countries and raising their cost of repaying dollar-denominated loans. The United States’ eagerness to use the dollar’s clout to impose financial sanctions against rivals and adversaries is also viewed uneasily by some other countries.

So far, though, no clear alternatives have emerged. The euro lags far behind the dollar. Even more so does China’s yuan; it's hamstrung by Beijing’s refusal to let its currency trade freely in global markets.

But the debt ceiling drama is sure to heighten questions about the enormous financial power of the United States and the dollar.

“The global economy is in a pretty fragile place right now,” Obstfeld said. “So throwing into that mix a crisis over the creditworthiness of US obligations is incredibly irresponsible.”



Harris, Endorsed by Biden, Could Become First Woman, Second Black Person to Be President

Vice President-elect Kamala Harris delivers remarks in Wilmington, Delaware, on November 7, 2020, after being declared the winners of the presidential election. (AFP)
Vice President-elect Kamala Harris delivers remarks in Wilmington, Delaware, on November 7, 2020, after being declared the winners of the presidential election. (AFP)
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Harris, Endorsed by Biden, Could Become First Woman, Second Black Person to Be President

Vice President-elect Kamala Harris delivers remarks in Wilmington, Delaware, on November 7, 2020, after being declared the winners of the presidential election. (AFP)
Vice President-elect Kamala Harris delivers remarks in Wilmington, Delaware, on November 7, 2020, after being declared the winners of the presidential election. (AFP)

She's already broken barriers, and now Kamala Harris could shatter several more after President Joe Biden abruptly ended his reelection bid and endorsed her.

Biden announced Sunday that he was stepping aside after a disastrous debate performance catalyzed fears that the 81-year-old was too frail for a second term.

Harris is the first woman, Black person or person of South Asian descent to serve as vice president. If she becomes the Democratic nominee and defeats Republican candidate Donald Trump in November, she would be the first woman to serve as president.

Biden said Sunday that choosing Harris as his running mate was “the best decision I've made" and endorsed her as his successor.

“Democrats — it’s time to come together and beat Trump,” he wrote on X, the social media platform formerly known as Twitter. “Let’s do this.”

Harris described Biden's decision to step aside as a “selfless and patriotic act,” saying he was “putting the American people and our country above everything else.”

“I am honored to have the President’s endorsement and my intention is to earn and win this nomination," Harris said. “Over the past year, I have traveled across the country, talking with Americans about the clear choice in this momentous election.”

Prominent Democrats followed Biden's lead by swiftly coalescing around Harris on Sunday. However, her nomination is not a foregone conclusion, and there have been suggestions that the party should hold a lightning-fast “mini primary” to consider other candidates before its convention in Chicago next month.

A recent poll from the AP-NORC Center for Public Affairs Research found that about 6 in 10 Democrats believe Harris would do a good job in the top slot. About 2 in 10 Democrats don’t believe she would, and another 2 in 10 say they don’t know enough to say.

The poll showed that about 4 in 10 US adults have a favorable opinion of Harris, whose name is pronounced “COMM-a-la,” while about half have an unfavorable opinion.

A former prosecutor and US senator from California, Harris' own bid for the 2020 Democratic presidential nomination imploded before a single primary vote was cast. She later became Biden's running mate, but she struggled to find her footing after taking office as vice president. Assigned to work on issues involving migration from Central America, she was repeatedly blamed by Republicans for problems with illegal border crossings.

However, Harris found more prominence as the White House's most outspoken advocate for abortion rights after the US Supreme Court overturned Roe v. Wade in 2022. She has also played a key role in reaching out to young people and voters of color.

In addition, Harris' steady performance after Biden's debate debacle solidified her standing among Democrats in recent weeks.

Even before Biden's endorsement, Harris was widely viewed as the favorite to replace him on the ticket. With her foreign policy experience and national name recognition, she has a head start over potential challengers, including California Gov. Gavin Newsom, Michigan Gov. Gretchen Whitmer and Pennsylvania Gov. Josh Shapiro.

Harris will seek to avoid the fate of Hubert Humphrey, who as vice president won the Democratic nomination in 1968 after President Lyndon Johnson declined to run for reelection amid national dissatisfaction over the Vietnam War. Humphrey lost that year to Republican Richard Nixon.

Nixon resigned in 1974 during the Watergate scandal and was replaced by Vice President Gerald Ford. Ford never won a term of his own.

Vice presidents are always in line to step into the top job if the president dies or is incapacitated. However, Harris has faced an unusual level of scrutiny because of Biden’s age. He was the oldest president in history, taking office at 78 and announcing his reelection bid at 80. Harris is 59.

She addressed the question of succession in an interview with The Associated Press during a trip to Jakarta in September 2023.

“Joe Biden is going to be fine, so that is not going to come to fruition,” she stated. “But let us also understand that every vice president — every vice president — understands that when they take the oath they must be very clear about the responsibility they may have to take over the job of being president.”

“I’m no different.”

Harris was born Oct. 20, 1964, in Oakland, California, to parents who met as civil rights activists. Her hometown and nearby Berkeley were at the heart of the racial and social justice movements of the time, and Harris was both a product and a beneficiary.

She spoke often about attending demonstrations in a stroller and growing up around adults “who spent full time marching and shouting about this thing called justice.” In first grade, she was bused to school as part of the second class to integrate Berkeley public education.

Harris’ parents divorced when she was young, and she was raised by her mother alongside her younger sister, Maya. She attended Howard University, a historically Black school in Washington, and joined the Alpha Kappa Alpha sorority, which became a source of sisterhood and political support over the years.

After graduating, Harris returned to the San Francisco Bay Area for law school and chose a career as a prosecutor, a move that surprised her activist family.

She said she believed that working for change inside the system was just as important as agitating from outside. By 2003, she was running for her first political office, taking on the longtime San Francisco district attorney.

Few city residents knew her name, and Harris set up an ironing board as a table outside grocery stores to meet people. She won and quickly showed a willingness to chart her own path. Months into her tenure, Harris declined to seek the death penalty for the killer of a young police officer slain in the line of duty, fraying her relationship with city cops.

The episode did not stop her political ascent. In late 2007, while still serving as district attorney, she was knocking on doors in Iowa for then-candidate Barack Obama. After he became president, Obama endorsed her in her 2010 race for California attorney general.

Once elected to statewide office, she pledged to uphold the death penalty despite her moral opposition to it. Harris also played a key role in a $25 billion settlement with the nation’s mortgage lenders following the foreclosure crisis.

As killings of young Black men by police received more attention, Harris implemented some changes, including tracking racial data in police stops, but didn’t pursue more aggressive measures such as requiring independent prosecutors to investigate police shootings.

Harris’ record as a prosecutor would eventually dog her when she launched a presidential bid in 2019, as some progressives and younger voters demanded swifter change. But during her time on the job, she also forged a fortuitous relationship with Beau Biden, Joe Biden’s son who was then Delaware’s attorney general. Beau Biden died of brain cancer in 2015, and his friendship with Harris figured heavily years later as his father chose Harris to be his running mate.

Harris married entertainment lawyer Douglas Emhoff in 2014, and she became stepmother to Emhoff’s two children, Ella and Cole, who referred to her as “Momala.”

Harris had a rare opportunity to advance politically when Sen. Barbara Boxer, who had served more than two decades, announced she would not run again in 2016.

In office, Harris quickly became part of the Democratic resistance to Trump and gained recognition for her pointed questioning of his nominees. In one memorable moment, she pressed now-Supreme Court Justice Brett Kavanaugh on whether he knew any laws that gave government the power to regulate a man’s body. He did not, and the line of questioning galvanized women and abortion rights activists.

A little more than two years after becoming a senator, Harris announced her campaign for the 2020 Democratic presidential nomination. But her campaign was marred by infighting and she failed to gain traction, ultimately dropping out before the Iowa caucuses.

Eight months later, Biden selected Harris as his running mate. As he introduced her to the nation, Biden reflected on what her nomination meant for “little Black and brown girls who so often feel overlooked and undervalued in their communities.”

“Today, just maybe, they’re seeing themselves for the first time in a new way, as the stuff of presidents and vice presidents,” he said.