Congressional leaders and Barack Obama appear to be nearer to an agreement on lifting the United States debt ceiling, with a proposal by the “Gang of Six” Democratic and Republican senators gaining new traction. It’s a matter of U.S. domestic politics, but failure could trigger a world economic crisis. And so it is incumbent on Prime Minister Stephen Harper and other world leaders to urge them on toward a deal.
Without a congressionally approved increase in the debt ceiling by Aug. 2, the U.S. will run out of new borrowing authority, forcing it to pick and choose among its existing obligations – to Social Security recipients, bondholders or its own employees. And so one consequence of failure would be a removal of money from the American economy. That would affect economies the world over, many of which rely on trade with the U.S. (and on which Canada remains especially dependent).
The U.S. would also enter into technical default and its debt would surely, and deservedly, be downgraded by major rating agencies. That would devalue the holdings of millions of people and institutions (including those in Canadian pension funds, government reserves and private accounts). Treasury bills, a lifeblood of its own economy and the world economy, would no longer be risk-free. That would put into play the “full faith and credit of the United States” on which global finance depends, limiting borrowing elsewhere and further threatening the prosperity of other economies.
The power the U.S. exercises on the world stage comes largely from its economic strength. Default would demonstrate the U.S.’s inability to meet its commitments. In addition to the economic consequences, that could lead to a loss of its moral authority in international affairs – and that would be a very bad thing.
Statements from leaders of some of the largest national economies on the need for a deal could sound the alert and give further support to the moderates seeking a deal. It may not persuade the obstructionists in Congress (who are also among the more nativist American politicians). But it would show that the world is watching, and that the stakes are higher than the obstructionists would suggest.
The precise details are for U.S. politicians to work out. But an arrangement is needed. For the U.S. to begin defaulting on its obligations would be catastrophic, not just for Americans, but for all those who depend on U.S. stability and leadership.