from The Water's Edge

Debt, Default, and American Power

July 17, 2011

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Budget, Debt, and Deficits

At the tail end of a post last week I posed the question of what the consequences would be for American power around the world if Washington fails to raise the debt ceiling and the United States defaults. I promised to post my answer within a few days. Well, you can find it in the Outlook section of today’s Washington Post.

In a nutshell, a default would do significant damage to American power. It would create greater pressure to cut defense spending, make it harder to negotiate with foreign capitals, and erode American soft power. A default also could potentially end the long run that U.S. Treasury’s have had as a safe haven. That may not sound like much, but the fact that global capital sees the United States as a safe haven during crises has long given Washington considerable flexibility in foreign policy.

Worse yet, the costs of a default would be wholly unnecessary—an unforced error (if you like tennis metaphors), an own goal (if you prefer soccer, excuse me, football metaphors), a fumble (in American football), or a Merkle’s Boner (if you know your baseball history) of epic proportions.

Two points I wish I had made in the Post piece but didn’t. First, the higher interest rates that a default would trigger would derail an already weak American economy, and potentially the global economy as well. That means lower government revenues, higher unemployment, ballooning deficits, and even greater pressure to cut defense spending and retrench overseas.

Second, even if Washington strikes a deal and all the default talk turns out to be empty hyperventilating—and that remains the most likely outcome—the ugly spectacle we have been witnessing over the past several weeks has already been undermining American power. Americans across the political spectrum find Washington’s current political food fight appalling; foreigners probably don’t find it any more appealing. And you can bet that China, Russia, Iran, and other countries that have been claiming for years that America is in terminal decline are saying that the debt ceiling negotiations prove their point.

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