Hopefully we will have extended the debt ceiling before this article hits the press. (It is a dangerous law and should be repealed if not found unconstitutional, but that is a discussion for another time.) That does not mean that the criminally stupid (no other words describe it) hostage-taking perpetrated by a tiny minority of the GOP caucus that controls the House of Representatives will not have consequences.

The financial markets have already reacted.  Bondholders are abandoning short term Treasury bonds; once the safest debt in the world. This indicates that the market experts believe (hope) that sanity will prevail before the U.S. government defaults. However, even if the crisis were to be resolved tomorrow, we will pay a price. The U.S. government (i.e., tax payers) will have to fork out a lot more money servicing the national debt. The last time the crazies took us close to the brink, the USG paid an additional one billion dollars in interest payments. (So much for reducing the deficit.)

If McCarthy and the Freedom Caucus do miscalculate and push us into default, the consequences will be catastrophic. Mind you, this is not to argue that the United States can avoid a serious relook at how it spends money; we do owe too much. But nor is it an argument for the President to give in to the blackmailers; accepting the Freedom Caucus’ ultimatum to avoid a debt default will still cost millions of jobs among working class Americans. (The rich have, in the words of one economist, already “priced in” the costs of the crisis.)

Until a few days ago, most of the rest of the world appeared to be ignoring the discussion. Americans focus mostly on the domestic repercussions and pay little attention to the international repercussions for the economic and geostrategic interests of the United States.

Given the paucity of international reporting in the American press I conducted my own informal and unscientific poll among friends and contacts abroad. Initially, most of my interlocutors said that they did not think the United States would default; that American politicians were engaged in domestic theater but would never go over the edge. An Egyptian acquaintance who does not like the United States very much believes it to be an American conspiracy, “…or a bi-partisan scarecrow branding to your creditors.”

Lately, foreigners seem a bit more worried. A tech industry executive in the Persian Gulf wrote: “We are just waking up to it here. It could well be the biggest financial disaster in modern American history.” Responses from Europe and the Middle East focused mostly on concern the crisis will hasten the end of the U.S. dollar as the dominant world currency. One Middle Eastern businessman wrote: “Hi Patrick, Note that most of our currencies are pegged to the dollar. … Lots of people are making baskets and balancing their account with other currencies like YEN, Swiss franc etc. Some are betting on WAN (a blockchain exchange mechanism). For sure, most people don’t believe that the U.S. $ will continue to be world currency. It is a matter of time.”​​

Responses from the Far East mirrored concerns that the crisis will seriously undermine the dollar as the world’s reserve currency and enhance China’s position as a global financial and political leader and enable China to increase its geopolitical influence. However, the response from the Far East focused more on the harm default would inflict on America’s strategic influence and military power.

Many fear that the U.S. debt crisis would reduce America’s ability to support its allies in the region. A default could severely limit the United States’ ability to fund military operations and maintain a robust military presence globally. If Republicans force a default, it would be seen as a triumph of isolationism.

Even if the United States avoids default, they write, the crisis already has called American reliability into question. China could exploit the crisis to forge stronger diplomatic and military ties throughout the region, either by intervening in regional disputes or coercing its weaker adversaries. Japan may need to reevaluate its defense strategies and increase its military spending, potentially deciding that it too needed a nuclear capability. South Korea would have even more incentive to go nuclear if the crisis were perceived to weaken the United States. One friend noted the similarity to the British withdrawal from the Indian Ocean region in 1971 following a severe economic crisis. London lost all control in the region, forever.

The position of the U.S. dollar as the world’s reserve currency underpins American prosperity and power. The U.S. dollar is the world’s reserve currency because the world banks in America; the world perceives the United States as the safest place to park its money.

American citizens do not seem to understand that those same foreign holdings of Treasury bonds have financed the cheap domestic credit that built our current prosperity. American citizens also need to understand that the position of the dollar as the reserve currency gives us more power and influence in the world than our nuclear arsenal and our carrier battle groups. We can seriously damage the economy of any country in the world, as we just did to Russia, by blocking its dollar deposits anywhere in the world and preventing its banks from trading in dollars. To be honest, we have overdone it, using financial sanctions as a blunt instrument far too often as a substitute for good diplomacy. Countries that we have sanctioned are doing their utmost to find ways of working around the dollar. A default would almost certainly destroy the dollar’s reserve currency status and force even our allies into trading in other currencies. It would be a Godsend for Putin, Xi Jinping, Kim Jong Il, and the mullahs in Tehran.