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The Global Costs of a U.S. Shutdown

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
April 6, 2011
cnn.com

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Sebastian Mallaby is an economics expert at the Council on Foreign Relations and the author of "More Money Than God: Hedge Funds and the Making of a New Elite."  Here's what he had to say about the dollar, the debt and a potential shutdown:

Amar C. Bakshi: How would a shutdown of the U.S. government potentially affect American foreign policy?

Sebastian Mallaby: I think there are two channels to think about. The first is a reputational one, where allies around the world look at the United States and say, “Gee their political system is so dysfunctional they can't even keep their government open, so what kind of a reliable ally can they be?”

I don't want to overstate that because obviously in a government essential personnel including the armed forces are not going to be furloughed and any potential shutdown is probably not going to last very long, but I think there is some additional cost to American reputation – its reliability and competence.

The second channel to think about is the debt market because ultimately American power depends on the American financial capacity to project power. And because of the status of the dollar as a reserve currency and the almost unlimited willingness of investors all over the world to finance American government debt, it has been possible for the U.S., particularly in a crisis when there is a flight to quality in capital markets, to count easy and plentiful funding to support its foreign policies.

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