What will happen to the dollar if America defaults on its debt?

A report on the Australian "The Conversation" website warned that the United States' failure to pay its debt threatens to trigger a global financial crisis and undermine the dollar, dealing a devastating blow to families, companies, and the American and global economy.

The author of the report, Michael Humphreys - who is vice chair of the Department of Business Administration at Touro University - said that the Republicans, who regained the majority in the House of Representatives last November, are threatening not to allow an increase in the debt ceiling unless it is accompanied by unspecified spending cuts.

He added that taking this step increases the risk of the US government falling into a predicament of default, considering that following the "brink of the abyss" policy with the debt ceiling has become a habit for US governments, as happened during the Bill Clinton administration in 1995, and the Barack Obama administration in 2011. and the Joe Biden administration in 2021.

The writer - an economist - talked about the realistic consequences that could result from defaulting on the national debt, and said that the mere threat of pushing the United States towards default would have an impact on the economy, noting that in August 2021, the possibility of a Default caused an unprecedented downgrade of the country's credit rating hurting the financial standing of the United States and causing losses to countless individuals.

Dollar collapse

According to the writer, if the Republicans push the United States to default on debt, the dollar is likely to lose its global standing and the government and companies will be forced to pay their international bills in another currency.

The writer pointed out that most foreign trade exchanges are denominated in dollars, and these exchanges pass through an American bank at some point, which is one of the important ways in which - through the dominance of the dollar - the United States takes enormous political power, especially to punish economic competitors and unfriendly governments, considering That default threatens to lose this dominance.

US House of Representatives Speaker Kevin McCarthy says that the Republicans will not allow the United States to default on its debt, but at the same time they want to find "a reasonable and responsible way in which we can raise the debt ceiling and control this unbridled spending," according to what Reuters reported earlier.

McCarthy already met last Wednesday with President Joe Biden without the meeting producing any results regarding settling disputes over US debt.

The rise of competitors

The author of the report warns that the collapse of the dollar will lead to the strengthening of China's position as the largest competitor to the United States for global influence, and although it is likely that the euro will replace the dollar as the main currency in the world, this means that the Chinese yuan will move to second place.

He pointed out that the yuan's transformation into an international currency will enhance China's global position on the economic and political levels, as China works with other BRIC countries (Brazil, Russia and India) to accept the yuan as a global unit of account.

With all three countries already resenting the economic and political dominance of the United States, a US default would support this effort.

Here, the "petro-yuan" initiative, initiated by China, floats to the surface with the aim of transforming the global economy, especially in supply and trade chains, which writer Zaki Tolstan Gultan considers, in a report published by the Ankara Center for Political and Economic Research, as efforts to de-dollarization.

Gultan emphasized that countries such as China and Russia, which want to transform the global system, seek to challenge the global economic hegemony built by the United States of America and reduce the global economy's dependence on the dollar, considering that the goal of these countries is not only to break the hegemony of the dollar, but also to build the hegemony of their currencies such as the yuan. and the ruble.

The suffering of individuals and companies

Returning to the "The Conversation" report, the writer says that, in addition to affecting the dominance of the dollar and the economic and political influence of the United States, default would affect countless people.

Tens of millions of Americans and thousands of businesses that depend on government support could suffer, the economy is likely to plunge into recession, and pensions will decline.

Last month, the US Treasury Department activated extraordinary liquidity management measures to prevent the $31.4 trillion congressional-imposed federal debt ceiling from being exceeded.

But without raising the ceiling by early June, the Treasury says it could run short of cash to pay government bills, raising the biggest risk of default since the debt ceiling crisis in 2011.

US Treasury Secretary Janet Yellen warned earlier that a US default would cause a "global financial crisis", lead to an increase in borrowing costs and undermine the dollar's position as an international reserve currency.

What is the debt ceiling?

The total national debt of the United States is about $ 31.4 trillion, which is the maximum that the US government can borrow, and this is the money that the US government owes to people who bought its bonds and other debt instruments.

Much of this debt is held by US companies or US citizens, although governments and foreign nationals have held more in recent years, and the value of this debt reached $ 7.5 trillion, and China, Japan and Britain have the lion's share of this debt.

About $8.5 trillion of this debt is what is called “internal government holdings.” This includes government funds such as Social Security and various government pension funds. These funds buy US debt, which means they lend money to the rest of the government.