How does a US debt default affect the dollar’s collapse?

How does a US debt default affect the dollar’s collapse?
How does a US debt default affect the dollar’s collapse?

The Indian newspaper The Mint confirmed that defaulting on the debts of the United States of America will lead to the collapse of the US dollar, noting that it will be difficult to predict the extent of the damage because it has not happened before.

The newspaper pointed to the meeting of congressional leaders during the past week, on the dispute over the debt ceiling crisis with President Joe Biden on May 9, 2023, as the clock approaches a potentially catastrophic stumbling block if nothing is done by the end of the month.

And the Republicans, who regained control of the House of Representatives in November 2022, threaten not to allow an increase in the debt limit unless they obtain spending cuts and a regulatory decline in return, which they identified in a bill passed in April 2023, and in doing so, they risk pushing the United States government to Default.

According to the report, debt-ceiling brinkmanship has become a ritual — as it did under the Clinton administration in 1995, then again with Barack Obama as president in 2011, and most recently in 2021, noting that defaults on the national debt It will have realistic consequences. Even threatening to push the US into default has an economic impact.

And in August 2021, the mere possibility of default led to an unprecedented downgrade of the country’s credit rating, hurting America’s financial prestige as well as countless individuals, including retirees.

Dollar collapse

The most serious outcome would probably be the collapse of the US dollar and its replacement as the “unit of account” for global trade, meaning essentially that it is widely used in global finance and trade.

Day in and day out, most Americans are probably unaware of the economic and political power that comes with being the world’s unit of account. Currently, more than half of global trade – from oil and gold to cars and smartphones – takes place in US dollars, with the euro accounting for about 30% and all other currencies making up the balance.

As a result of this dominance, the United States is the only country on the planet that can pay its foreign debts in its own currency, and this gives both the US government and US companies a large space in international trade and finance, according to the Mint.

She added that no matter how much debt the US government owed to foreign investors, it could simply print the money needed to pay it off — though for economic reasons, it might not be wise to do so.

Other countries have to buy dollars or euros to pay off their foreign debts, and the only way for them to do that is to either export more than they import or borrow more dollars or euros on the international market.

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