Mary E. Lovely & Katheryn Russ
In an attempt to weaken US diplomatic and military influence, Russian President Vladimir Putin has waged a propaganda war to convince other countries that the United States is engaging in a “purposeful, conscious US strategy to destabilize and make chaotic the situation in [Taiwan] and the world.” Chinese President Xi Jinping has lined up with Putin on that score, and the US military has warned that China’s parallel campaign of disinformation is intended to create “doubt amongst our allies and partners in the reliability of the United States.”
The Republican majority in the House would be doing Beijing and Moscow’s work for them if they refuse to raise the debt ceiling, sowing irreparable doubt among even our closest allies not just about US financial commitments, but about any promises we have made to other countries. US Treasury bonds are IOUs to people who have lent the US money. Since the national debt hit its limit in January, the US Treasury has been taking extraordinary measures to cover these bond payments, but is quickly running out of options. If Congress doesn’t lift the debt ceiling, the US could default sometime between July and September, and possibly even sooner.
There are few things that undermine people’s confidence in a partner’s stability and goodwill more than getting stiffed. US bonds have been the world’s premier safe asset for decades, largely due to our reliable repayments, allowing us to borrow from domestic and overseas investors at highly favorable terms even at times of national crisis, such as the 2008 global financial crisis or the recent Covid-19 pandemic.
Even if the United States finds some way to “prioritize” paying allies first, defaulting on any of this debt would undermine the confidence of any country or investor who holds US bonds. Moreover, our allies account for the majority of externally held US Treasuries. It’s a who’s who of our closest allies in the Pacific, including Japan, Taiwan, Singapore and South Korea. Also among them are countries of key geostrategic importance in our competition with China, including India, the Philippines, Thailand and Vietnam.
Together, these countries hold roughly $2 trillion in US Treasuries. Other key allies – Australia, Canada, France, Great Britain and Germany – hold more than $1 trillion in US Treasury securities. Stiffing them would irreparably undermine the trust essential to military and diplomatic coordination around the world, putting our national security at risk. Defaulting on this debt would also weaken our greatest weapon in the new era of unconventional warfare: the ability to freeze large portions of rogue states’ economies through sanctions.
US sanctions are powerful because of the dominant position of the dollar in the global economy. Global markets price key commodities like oil in dollars, and international payments flow through a global banking system that depends on access to US dollars for transactions. All of this is at risk if we default. Fear of not getting repaid on time makes US Treasury securities less attractive as a way to hold foreign reserves, reducing the global demand for dollars. This weakening of official dollar purchases would likely increase volatility in the dollar’s value against other currencies and decrease liquidity, prompting investors to reduce their holdings of dollars in any form.
Loss of confidence would filter into other transactions, including the use of the dollar to price contracts for cross-border loans or imports and exports. In short, failure to raise the debt limit would weaken our national security because it is precisely the world’s trust and confidence that the United States government will pay its debts in full and on time that helps keep the dollar as the world’s dominant currency.
The danger of a US default goes well beyond global finance. Undermining trust in the US would set back any efforts to make our supply chains more secure and resilient. Stronger partnerships with Europe and countries in the Indo-Pacific are central to American efforts to reduce reliance on China for critical supplies. To succeed, the US needs like-minded countries to invest in new energy and technology value chains, something they will only do if they believe America is a reliable financial partner, able to fulfill its commitments over the long term, even in an era of extreme partisanship. The current weaponization of US debt obligations by House Republicans is rightly seen by our allies and foes as a major test of the credibility of all of America’s commitments.
As competition for economic alliances heats up around the globe, any congressional delay in raising the US debt limit plays directly into Xi’s and Putin’s hands. The responsible way to control growth in the national debt is by raising taxes and cutting spending in a process of budget negotiations based on good faith. That some in Congress are holding the debt limit hostage to bypass the hard work of budget negotiations creates a national security threat where none should exist.