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Issue Guide: Global Implications of the U.S. Debt Crisis

Authors: Jonathan Masters, Deputy Editor, and Christopher Alessi
Updated: August 1, 2011

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Introduction

Fears of a new global economic crisis have sharply risen as Washington lawmakers carried their dispute over how to raise the nation's $14.3 trillion debt ceiling and avoid default close to the August 2 deadline. Senior figures from both U.S. parties, as well as business leaders, the IMF chief and officials from many countries have warned of the consequences for the world economy if the White House and Congress fail to reach a deal. President Barack Obama announced on July 31 that a deal had been reached that he called a "serious down payment on the deficit reduction we need" but which still requires the support of lawmakers in both chambers of Congress. The following materials provide background and analysis on the global implications of the U.S. debt crisis.

Analysis Brief: U.S. Debt and Prestige -- Downgrade?

Whatever the outcome of the debt ceiling debate, many analysts expect a downgrade in the U.S. debt rating because of doubts about deficit-reduction plans. The fallout could include higher borrowing costs, a weaker dollar, and market turbulence.

Interview: Tightening the Pentagon's Belt

Defense-spending cuts should be a big part of a deficit reduction deal, says CFR's Richard Betts, with the Pentagon pursuing a budget that reflects a reduced threat environment and limits the production of expensive, state-of-the-art equipment.

Interview: Global Aftershocks of a U.S. Default

A protracted debt default would have serious global repercussions, but even without a default, a likely downgrade of U.S. debt and the absence of a fiscal reform plan are weakening the U.S. and unsettling world markets, says economist Uri Dadush.

Essential Document: IMF Report on U.S. Fiscal Policy, July 2011

International Monetary Fund (IMF) executive directors released their yearly report on the U.S. economic situation on July 25, 2011, noting, U.S. fiscal policy faces tighter constraints going forward, given unsustainable public debt dynamics.

Video: Charting the IMF's Role Amid U.S. and Eurozone Debt Concerns

Christine Lagarde, the newly appointed managing director of the International Monetary Fund, discusses the IMF's changing role amid growing concerns over U.S. and eurozone debt with Tom Glocer, chief executive officer of Thomson Reuters.

Essential Document: Hillary Clinton: Remarks on Principles for Prosperity in the Asia-Pacific

U.S. Secretary of State Hillary Clinton assured a delegation in Hong Kong that U.S. lawmakers would do the "right thing" and reach a deal to raise the debt ceiling before August  2, while also highlighting the importance of economics in U.S. foreign policy.

Must Read: Economist: What if the Talks Fail?

Having seen what happened with Lehman Brothers in 2008, the main worry of a U.S. default would be a freeze in global markets.

Interview: C. Fred Bergsten: Why the U.S. Needs to Cut the Deficit

Even if the United States cobbles together an agreement to raise the debt ceiling before August 2, lawmakers will still need to hash out a long-term, deficit-reduction package to avoid market disruption and preserve U.S. global standing, says Peterson Institute economist C. Fred Bergsten.

Must Read: Foreign Policy: Worst. Congress. Ever.

The current level of political dysfunction and ideological polarization in Congress is beyond the norm. A broken legislative branch risks plunging the United States into an economic catastrophe and damaging the nation's global standing, writes Norman Ornstein.

Must Read: Economist: Dicing with Debt and the Future

This analysis outlines eight reasons why the "Theory of Inevitable Compromise"--that Republicans and Democrats will ultimately hammer out a deal to raise the nation's debt ceiling ahead of August 2--may not hold true in this instance.

Must Read: FT: From Italy to the U.S., Utopia V. Reality

The United States may be on the verge of making one of the biggest and least-necessary financial mistakes in world history, while the eurozone could be approaching a financial crisis that destroys not just countries' solvency but possibly the currency union and much of the European project, writes the Financial Times' Martin Wolf.

Article: Max Boot: Grand Old Doves?

CFR's Max Boot says the preparedness of the U.S. military cannot be sacrificed for a federal budget deal.

Expert Brief: Sebastian Mallaby: The Folly of U.S. Debt Brinkmanship

Gridlock over raising the debt ceiling has already tarnished Washington's image, and failure to address the problem could cause global financial upheaval.

Foreign Affairs: Altman and Haass: American Profligacy and American Power

CFR's Richard N. Haass and Evercore's Roger C. Altman argue that a failure to curb U.S. debt addiction will result in an age of American austerity--not just for Americans' standard of living but also for U.S. foreign policy and the coming era of international relations.

Foreign Affairs: Joseph S. Nye: The Future of American Power

Harvard's Joseph Nye writes that while it is fashionable to predict a decline in U.S. power, the United States is not in absolute decline, and in relative terms there is a probability that it will remain more powerful than any other state in the coming decades.

Foreign Affairs: Leslie H. Gelb: GDP Matters More Than Force

Most nations have adjusted their foreign policies to focus on economic security, but the United States has not. Today's leaders should adapt to an economic-centric world and look to Presidents Harry Truman and Dwight Eisenhower for guidance, writes CFR's Leslie Gelb.

Backgrounder: U.S. Debt Ceiling: Costs and Consequences

As the United States approaches the deadline to raise its debt limit, economists warn of a fiscal crisis and higher borrowing costs for U.S. businesses and homeowners.

Expert Roundup: The Budget Deficit and U.S. Competitiveness

Five experts discuss the implications for U.S. global competitiveness of running large budget deficits, and what should be done to reign in the fiscal shortfall.

Essential Document: Obama's Speech on the Budget Deficit, April 2011

Obama calls for a $4 trillion reduction in the annual budget deficit over twelve years, including cuts in defense spending, reductions in healthcare outlays, and tax increases.

Essential Document: National Commission on Fiscal Responsibility and Reform Report

This is the final version of the White House's National Commission on Fiscal Responsibility and Reform, co-chaired by Erskine Bowles and Republican Alan Simpson.

Must Read: Fareed Zakaria: Are America's Best Days Behind Us?

Fareed Zakaria discusses the relative decline of the United States and the potential for short-sighted fiscal fixes that will endanger long-term U.S. competitiveness.

Article: Center for American Progress: A Historical Perspective on Defense Budgets

CAP experts examine the lessons to be learned from past presidents about reducing defense spending.

Policy Brief: Harvard Belfer Center: The Grand Strategic Consequences of U.S. Decline

Belfer Center experts examine eighteen cases of acute relative national decline since 1870, and recommend the United States pursue a retrenchment policy that projects a more modest global presence.

Further Reading:

CFR's Renewing America project explores six major domestic challenges facing the United States that have significant consequences for national security and foreign policy.

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