The American people and economy are likely to lose the “Exorbitant Privilege” we get from being the international Reserve Currency if US politicians continue to flirt with default. Boy am I tired of hearing Teaparty congressmen say that defaulting on our obligations by not raising the debt ceiling won’t be a problem. At least one of them has actually said that it would be a good thing. Sen. Mike Crapo (R-ID), said on Sept. 23 to PolicyMic, ” I don’t think it’ll happen, but if it did it would be very short… It all depends on what it generated. If it generates some real progress toward entitlement reform and getting tax reform teed up for activity, then I think that’s one of the best things that could happen for young people.” I really don’t think that many in Congress understand what even a single days default could mean.
Let’s forget for now the catastrophic damage to our economy, and the world’s economy in general, if we default for any significant length of time, meaning more than a day or two. Let’s talk about the damage to the American people and economy from even another serious close shave with the debt limit. The US Dollar is the Reserve Currency of the world, and this grants to us what the French Minister of Finance in the 1960’s, Valéry Giscard d’Estaing, called the “Exorbitant Privilege”. I will not go into the gory academic explanation of this, if you are interested Wikipedia has an excellent article on it with links to technical data, but suffice it to say that it allows Americans to purchase imports and borrow across borders more cheaply than persons in other nations because they need not exchange their currency to do so. “OK,” you say, “I guess that sounds good, but I can’t see it being a big deal.” Au contraire, this will have a direct impact on the lives of every American. It means, since we import many more products than we export, that the cost of most everyday items (including food) will immediately go up if the Dollar is no longer the international reserve currency.
“Fine, you’ve made your point,” the skeptic says, “but why would the US Dollar no longer be the world’s reserve currency just because of close calls with the debt ceiling?” Well, quite simply, many economic and political leaders in the world already want to stop using the Dollar as the international reserve currency and want to use a currency that is not controlled by a single government. When the US was the lone economic super power, there was not much worry of this happening, we could simply throw our considerable weight around on the political stage and keep everyone in line, not true any longer. History chronicles many changes in the reserve currency over the millennia, among them the Greek Drachma to the Roman Denari to the Byzantine Solidus, the Venetian Ducato, the Dutch Guilder, and more recently the British Pound Sterling and then the US Dollar. The changes are more often than not the result of a shift in political power, as you would expect.
Since the introduction of the Euro it has gained more and more prominence as a reserve currency, since 2002 it has averaged about 25% of the official foreign exchange reserves, flipping those numbers around so that the Euro is 75% and the Dollar is less than 25%, would only take some political will by world bankers. The more that US politicians toy with default, the more that the world’s bankers become concerned with whether the “Full Faith And Credit of the US Government” is something they can continue to “bank” on, and the closer we get to losing the “Exorbitant Privilege”. The recession/depression this would cause should take the US a very long time to dig our way out of, at least in my opinion.