U.S. Could “Default” on Its Exceptionalism, and It Might Already Have

Imagine for a moment you are part of the political elite in a country that regularly boasts of its “exceptionalism.”

Now imagine you are three weeks away from a decision that could cause global economic chaos.

Would you be playing political games or trying to get the problem solved?

Welcome to Washington, the capital city of the United States, where – at least publicly – too many politicians seem eager to make more and more Americans worry each day about something called the debt ceiling. And, yes, economists and elites in multiple countries are beginning to share in that anxiety.

The U.S. Congress must decide no later than June 1 whether to raise the debt ceiling, which represents the amount of money the country is allowed to borrow in order to meet its financial demands. Republicans control the House of Representatives, and they appear willing to play the “stare down” game with President Joe Biden instead of joining with him to seek a solution. In case you are not familiar with that game, two people continue to stare at each other, and the loser is the one who blinks first.

When two kids play it, there is nothing more at stake than “yes, I won!” But when political leaders play it, the absence of ethical leadership is obvious.

If no deal is made before the end of this month, then the debt ceiling is not raised. The U.S. would be in default and not able to send out checks to federal employees or to men and women in the military. It also would not be able to send out Social Security checks to America’s elderly. Nor would it be able to make Medicare payments that cover the healthcare expenses of America’s senior citizens.

The ripple effects also include the U.S. not being able to make payments on its existing debt obligations.

This is not exceptionalism. In fact, there is only one word to describe it: pitiful.

Moody’s Analytics, the internationally respected agency that assesses credit ratings, has suggested that if America’s political elites continue to do nothing after June 1, the U.S. stock market might lose 20 percent of its value, and as many as seven million Americans might be laid off.

Yes, a recession would follow, and that recession would lead many smaller nations to do the same. In addition, the dollar, the global standard for international business, would lose some of its luster, opening the door for countries such as China to push their currency as potential replacements.

Clearly, the potential for default is the most important problem facing the U.S. at the moment, right? Well…maybe. Remember, three U.S. banks – Silicon Valley Bank, Signature Bank and First Republic Bank have folded this year. No banks had folded since 2020, so three in mere weeks is big news. Lots of questions are being asked by millions of Americans about the health of the banks that keep their money.

When Silicon Valley Bank and Signature Bank closed in March, there was criticism from some politicians that the U.S. was about to see a repeat of 2008 – when the federal government put together a plan to rescue some of the country’s most prominent banks. However, media reports showed that had the government not stepped in in March, there was a legitimate chance that panicked bank customers all across the country would have closed their accounts, a move that would have caused other banks to be shuttered.

First Republic Bank was especially exposed to financial chaos because many of its customers exceeded the $250,000 limit that the Federal Deposit Insurance Corporation (FDIC) will guarantee. After the failure of Silicon Valley Bank, customers of First Republic Bank grew concerned that they might lose most of their money if that bank went belly up. Both banks had headquarters in northern California, which explains why the domino effect took place. Once customers rushed to close their accounts, First Republic Bank was doomed.

In the case of First Republic Bank, there is good news. JP Morgan Chase acquired the bank’s deposits and assets, a move that allowed for the banks’ branches to remain open for their customers. Nevertheless, the FDIC estimates that it will fork out $13 billion because of First Republic Bank’s collapse.

Americans are taking note, and they are worried. Last week, Gallup reported that 48 percent of Americans say they are either “moderately worried” or “very worried” about the U.S. banking system. Granted, specific sections of the American population are more worried than others, but there is no way to positively spin that nearly half the country worries about the health of the banking system.

America’s political paralysis also is real, and there should be rampant fear about that. Republicans appear more and more interested in seeing the federal government wither away to nothing, while Democrats lack both a persuasive message and a strong enough majority to ensure meaningful policies can be enacted. Viewed another way, the Republicans will not do anything and the Democrats cannot do anything.

Exceptionalism? Hardly.

The article reflects the author’s opinions, and not necessarily the views of China Focus.