I listened today to an economist talk about what a default on our US Treasury debts would mean to interest rates here in the United States and around the world.
First, it must be understood what is meant when economists refer to the US dollar as the reserve currency of the world. People, corporations, institutions and other countries buy US Treasuries as a means of holding cash. Yes, it is not like dollar bills in your wallet because the US Treasuries that they buy pay an interest rate.
This interest rate is considered by much of the world to be the least likely debt instrument to default. And, because it is considered as such, it carries one of the lowest interest rates for a short term debt instrument, a Treasury Bill.
If the United States defaults on its debt, our US Treasury Bills will no longer be considered the safest short term debt instruments in the world. As a result, interest rates on Treasury Bills, notes and bonds will go up.
But, that is not all! The interest rates on everything else will also go up. Higher interest rates have a way of slowing down the economy, and since US Treasury debt is held by people, corporations, institutions and foreign governments, the economy of the whole world will slow down.
Corporations and other large institutions are constantly looking to invest in bigger and better buildings and plant and equipment, but each project's approval is based on an interest rate assumption for that project. Many projects at higher interest rates are not feasible to do, so they are put back on the shelf for another time. This happening around the world means that economic growth is thwarted!
I don't expect people in Congress to understand what I have just written, but I hope the lobbyists that line their pockets with campaign contribution do. Hopefully, corporate America will explain this to those Republican Congress people that don't understand a fucking thing about economics or for that matter world finance, a world reserve currency or how the economies of the world are so tied together that a default by the United States, the largest economy in the world, will impact the rest of the world too.
Let us pray.