Crikey Clarifier

Oct 11, 2013

Crikey Clarifier: what would happen if the US defaults?

US Republicans have edged a little closer to a deal with Barack Obama on the government shutdown and raising the debt ceiling. But what if that can't meet the deadline? Crikey looks at the consequences.

Myriam Robin — Media Reporter

Myriam Robin

Media Reporter

Last week, the United States Treasury released a report on the global consequences of a default. It makes for stark reading:

“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth with many private sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression.

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11 thoughts on “Crikey Clarifier: what would happen if the US defaults?

  1. John64

    “Another failure here could further accentuate perceptions of its economic decline.

    But back to reality …”

    What do you mean “back” to reality? Are we talking about the same things here? The Government of the United States of America, right now, has shut-down.

    Let me say that again: The Government of the United States of American, has shut-down.

    Imagine if the board McDonalds shut-down the whole company because half the board couldn’t agree with the other half over what toy should be in the Happy Meals? Imagine if Coca-Cola shut-down because they couldn’t agree on what their next product launch should be.

    Companies don’t do it, because it’s stupid. The American Government right now, is being profoundly stupid.

    What, you reckon they’re going to suddenly stop being stupid?

    Oh yeah, not to mention that this is THE SECOND TIME this has happened. And that’s even after the scare they all had the first time they almost defaulted.

    It is clear there are elements within the US Government who have no qualms about pushing this to the brink – and over.

    That’s reality.

  2. Myriam Robin

    Hi John,

    It’s actually the 17th time the American government has shut down. Which is even more amazing.

    I was obviously drawing a dinstction between a default and a shutdown. But yea, both are pretty bad.

  3. tonyfunnywalker

    Miriam you needed to be more specific and it would have been useful if you had looked at implications to both the world and economy and Australia in particular. Paul Kurgman is trying to look at the implications within the US but having experienced first hand the default in Argentina in 2000 was an eye opener as to the knock on effects on society generally.

  4. Kevin_T

    “Westpac economists Sean Callow and Richard Franulovich wrote yesterday that this’ll keep the American dollar low, which could have positive effects for the Australian dollar. ”

    What is the definition of “positive effects” for the Australian dollar?

    I would have thought this would have the potential to make the Australian dollar rise dramatically against the US dollar, but if we are a country that is looking at exports as being important to our economy than the effects aren’t really positive, while if we believe that cheap imports are a bonanza for Australians, the effects *may* be positive, depending on whether the default causes rapid inflation, as those manufacturers or retailers who trade in US dollars have to lift their prices as the value of the US dollar falls.

  5. Myriam Robin

    @tonyfunnywalker: You might be interested to know that I did ask about the precedents. One of the distinctions Oliver made when I spoke to him was that unlike Argentina, America has enough money to easily pay its debts and is not currently in economic crisis. This suggests the situation would likely be more contained than what happened in Argentina.

    @Kevin_T: I used ‘positive effects for the dollar’ to mean ‘it would appreciate in value’. Which exporters wouldn’t consider positive, but is positive in a strictly numerical sense. But it is sloppy – I’ll be more specific next time.

  6. Gavin Moodie

    The country between Canada and Mexico is the United States of America. ‘America’ is the continent that the USA shares with 34 other countries.

  7. Cee Gee

    @gavinmoodie – nice to see someone in Australia notice – as a South American (way south, southern hemisphere south) it was once annoying (people thought south america was texas or florida), but now eye just rollingly amusing.

  8. Gavin Moodie

    Thanx Cee Gee. People accuse me of pedantry, but I think that US hegemony is already excessive, without conceding it geography.

  9. Liamj

    I find it sad that noone can see the upsides to US govt shutdown and even default. Lets start with remembering that the ‘recovery’ in US is a fiction cobbled together out of unprecedented money printing, crashing wages & conditions, & trashing of land and water resources by fracking for scraps of oil & gas. This BAU is not worth saving, & if crashing the whole corrupt & violent economic ponzi scheme is the only way to stop it, so be it.

  10. ian cornish

    John64 mcdonalds is not a democracy its a profit driven corporation where the board generally think alike.
    Sure the usa is a pretty poor democracy basically representing corporate interests but its but your analogy us poor

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