If the debt crisis in Washington finally plunged the United States into recession, the US economy would hardly sink on its own.

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

No corner of the global economy will be spared like the US government

standard

defaults and the crisis

hasn’t been

resolved quickly, said Mark Zandi, chief economist at Moodys Analytics.

Zandi and two Moodys colleagues have concluded that even if the debt limit were breached

just over again

week, the US economy would weaken so much, so nearly, that about 1.5 million jobs would disappear.

And if a government default lasted much longer, well into the summer, the consequences would be much more serious, Zandi and his colleagues found in their analysis. US economic growth would fall, 7.8 million US jobs would disappear, borrowing rates would rise, the unemployment rate would rise from its current 3.4% to 8%, and a stock market crash would wipe out $10 trillion in household wealth

they concluded

.

Of course it can’t come to that. Seeking a breakthrough, the White House and House Republicans concluded a round of debt limit negotiations on Sunday, with plans to resume talks on Monday. The Republicans have threatened to make the government default on its debts by refusing to raise the legal limit on what it can borrow unless President Biden and the Democrats agree to major budget cuts and other concessions.

This time, the debt ceiling crisis could really end in disaster. debts long considered ultra-secure

The fear is fueled by the fact that so much financial activity depends on confidence that the US will always meet its financial obligations. Its debt, long seen as an ultra-secure asset, is a foundation of global trade built on decades of trust in the United States. A default could destroy the $24 trillion government bond market,

freeze cause

financial markets

to freeze

and unleash an international crisis.

A default would be a catastrophic event, with unpredictable but likely dramatic consequences for U.S. and global financial markets, said Eswar Prasad, a trade policy professor at Cornell University and a senior fellow at the Brookings Institution.

The threat has arisen as the global economy grapples with an array of threats, from rising inflation and interest rates to the ongoing repercussions of Russia’s invasion of Ukraine to the tightening grip of authoritarian regimes. In addition, many countries have become skeptical about America’s excessive role in global finance.

In the past, US political leaders have generally been able to step off the brink and raise the debt limit before it was too late. Congress has raised, revised, or extended the borrowing ceiling 78 times since 1960, most recently in 2021.

Still, the problem has gotten worse. Partisan divisions in Congress have widened, while debt has grown after years of rising spending and sweeping tax cuts. Treasury Secretary Janet Yellen has warned that the government could go bankrupt on June 1 if lawmakers do not raise or suspend the cap.

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If the reliability of [Treasurys] were to be compromised for any reason, it would send shockwaves through the system…and have huge implications for global growth,” said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund .

Treasuries are widely used as collateral for loans, as a buffer against bank losses, as a refuge in times of great uncertainty and as a place for central banks to store foreign exchange reserves.

Given their perceived safety, U.S. government debt, Treasury bills, bonds, and notes have a zero “risk weighting” in international banking regulations. Foreign governments and private investors hold nearly $7.6 trillion of debt, about 31% of government bonds in the financial markets.

Because the dollar’s dominance has made it the de facto world 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 the high demand for dollars also often makes them more valuable than other currencies, and that comes at a cost: A strong dollar makes U.S. goods more expensive compared to their foreign rivals, putting U.S. exporters at a competitive disadvantage. That is one of the reasons why the United States has had trade deficits every year since 1975.

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Of all foreign exchange reserves held by the world’s central banks, US dollars represent 58%. No. 2 is the euro at 20%. According to the IMF, the Chinese yuan makes up less than 3%.

Federal Reserve researchers have calculated that from 1999 to 2019, 96% of America’s trade was billed in US dollars. About 74% of trade in Asia. Elsewhere outside Europe, where the euro dominates, dollars accounted for 79% of trade.

The US currency is so reliable that merchants in some unstable economies require payment in dollars, rather than their own country’s currency. Take Sri Lanka, ravaged by inflation and a staggering drop in the local currency. Earlier this year, shippers refused to release 1,000 containers of urgently needed food unless paid in dollars. Shipments piled up at the docks in Colombo as the importers could not get dollars to pay the suppliers.

Without [dollars], we cannot make any transaction, said Nihal Seneviratne, a spokesperson for Essential Food Importers and Traders Assn. When we import, we have to use hard currency, usually US dollars.”

Similarly, many shops and restaurants in Lebanon, where inflation has raged and the currency has plummeted, demand payment in dollars. In 2000, Ecuador responded to an economic crisis by replacing its own currency, the sucre, with dollars.

The go-to haven for investors

Even when a crisis breaks out in the United States, the dollar is invariably the haven for investors. That happened in late 2008, when the collapse of the US real estate market outran hundreds of banks and financial firms, including the once mighty Lehman Bros.: The value of the dollar skyrocketed.

Even though we were the problem, there was still a flight to quality in the United States,” says Clay Lowery, who conducts overseas research at the Institute of International Finance, a banking trade group. The dollar is king.’

If the United States went over the debt limit without resolving the dispute and the Treasury defaulted on its payments, Zandi suggests the dollar would rise again, at least initially, because of the uncertainty and fear. Global investors just wouldn’t know where to go except 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 could instead shift money into US money market funds or bonds from leading US companies. Ultimately, says Zandi, growing doubts would push the value of the dollar down and keep it low.

The government’s strategy if the debt ceiling is breached

In a debt-ceiling crisis, Lowery, who was assistant secretary of the treasury during the 2008 crisis, envisions the United States continuing to make interest payments to bondholders. And it would try to pay its other obligations to contractors and retirees, for example, in the order in which those bills fell due and as funds became available.

For example, for bills due on June 3, the government could pay on June 5. There would be some relief around June 15. Then government revenues would pour in, as many taxpayers make estimated tax payments for the second quarter.

The government would likely be sued by those who don’t get paid, someone living on veterans’ benefits or Social Security,” Lowery said. And rating agencies would likely cut US debt even if the Treasury continued to pay interest to bondholders.

While the dollar remains globally dominant, it has lost some ground in recent years as more banks, businesses and investors turn to the euro and, to a lesser extent, the Chinese yuan. Other countries tend to resent that fluctuations in the value of the dollar can hurt their own currencies and economies.

A rising dollar can create crises abroad by attracting investment from other countries and increasing their cost of paying back dollar-denominated loans. The eagerness of the United States to use the influence of the dollar to impose financial sanctions on rivals and adversaries is also seen as uncomfortable by some other countries.

So far, however, no clear alternatives have emerged. The euro lags far behind the dollar. In fact

the Chinas

yuan; it is crippled by Beijing’s refusal to allow its currency to trade freely in world markets.

But the debt ceiling drama will certainly raise questions about the enormous financial power of the United States and the dollar.

The global economy is currently in a pretty fragile position,” Obstfeld said. So it is incredibly irresponsible to throw a crisis over the creditworthiness of US obligations into that mix.”