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Macroscope | Latest debt ceiling debacle erodes US dollar’s attraction as world’s reserve currency
- It is clear to everyone except US lawmakers that the latest stand-off over the US debt ceiling will have sweeping repercussions
- Washington’s actions will do more than reputational damage to the US dollar, acting as a catalyst for badly needed global monetary reform
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It has long been clear, except to those US lawmakers who appear to lack a sense of political and financial responsibility to the country and to the world, that the outcome of repeated debt ceiling stand-offs between Congress and the president will be highly negative. It will prove to be so this time – with a vengeance.
The US dollar remains on top for the moment, with all the privilege that being the world’s principal reserve currency confers. But with the United States showing little of the sense of duty that this status demands, it is becoming clear that it lacks legitimacy.
If a country enjoys the privilege and convenience of having its currency accepted almost universally in financing trade and investment transactions, as well as being a repository for the world’s savings, then it must show respect for users of that currency or face having its role usurped.
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As the Peterson Institute of International Economics in Washington pointed out in recent articles, there is more at risk than reputational damage to the US dollar. A US debt default or prolonged debt ceiling brinkmanship could have profound global repercussions, eroding the dollar’s status as the world’s reserve currency and the country’s global standing.
A default would provide China an opportunity to project itself as being a more reliable hegemon. Reduced global reliance on the US dollar could undermine the effectiveness of future US financial sanctions and limit Washington’s economic leverage to secure foreign policy aims.
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Yet during repeated stand-offs between different parts of its government and political establishment over domestic debt issues, the world’s biggest economy has been able to behave without regard to the impact on the wider world. This time really will be different, though.
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