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Macroscope | Even with a tentative US debt ceiling deal, Washington needs reform or the dollar will suffer
- Markets should be relieved Biden and Congressional Republicans have struck a deal ‘in principle’, but the debacle was wholly unnecessary
- While the dollar is not going to fade away, more crises like this one will erode its standing and ensure the yuan becomes more appealing
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US President Joe Biden has reportedly struck a tentative deal with Republican House Speaker Kevin McCarthy to hopefully avoid a devastating debt default before the government runs out of money in little more than a week’s time.
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The deal still needs approval from a divided US Congress. However, the markets should be relieved that a truce has been reached in principle on raising the government’s US$31.4 trillion debt ceiling limit.
It’s a crisis that should never have happened in the first place. The fact US lawmakers on Capitol Hill were prepared to stare each other down in a game which could still end up in a catastrophic US default, an unthinkable downgrade in the US’ triple-A credit rating, or another global crash in the worst-case scenario, is an unforgivable act of political recklessness.
Confidence in the US government debt market has been holed below the waterline. For long-term holders of US Treasuries, especially large official reserve managers such as China and Japan, it would be no surprise to see investors looking to hedge their bets in future.
While the debt ceiling crisis appears to have been avoided for now, the problem is not going to go away until US leadership mends its ways. The US budget mess has gone on far too long, with successive governments spending too freely and taxing too little. The endless supply of Treasury bonds to plug the budget deficit not only causes a huge drain on world savings; it also poses a major threat to global financial stability.
The US dollar is such a cornerstone of the global capital markets and international payments system that another run-in of this magnitude could be the last straw. Something needs to change, and quickly. Either the US government puts its house in order or rational investors will vote with their feet.
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