We cannot know exactly how disastrous the failure of Congress to increase the debt ceiling would be to the global financial system. It is wholly unprecedented to test what once was an unshakable foundation-that the United States of America will always make good on its financial promises.
But what is clear is that the debt ceiling debate in Washington, which many around the world are watching as if their lives depended on it (because they might), is already damaging our nation's standing just as it was starting to recover from the twin blows of the Iraq War and the Wall Street-born financial crisis. It is also providing ample evidence to those who argue that America is a power in decline.
Until recently, the Chinese were restrained in public, urging the United States to think of its "customers" but also outwardly confident that Washington would strike a last-minute deal. In private, however, with more than $1 trillion in U.S. Treasuries at stake, they have been going quietly berserk. As Stephen Roach, nonexecutive chairman of Morgan Stanley Asia, put it, "Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, ‘This is truly shocking. ... we understand politics, but your government's continued recklessness is astonishing.'"
Now, a published report in the state-run English-language Xinhua newspaper opines, "Given the United States' status as the world's largest economy and the issuer of the dominant international reserve currency, such political brinkmanship in Washington is dangerously irresponsible, for it risks, among other consequences, strangling the still fragile economic recovery of not only the United States, but also the world as a whole."
For the Chinese, this has to be a rich but unsettling role reversal. They have been on the receiving end of countless American entreaties to be more responsible themselves. Some in China are even citing the budget impasse as evidence of the shortcomings of democracy as a political system. As the Xinhua report asks, "How can Washington shake off electoral politics and get difficult jobs done more efficiently?"
In the world's largest democracy, India, officials there are incredulous, according to Reuters. "How can the U.S. be allowed to default?" said an official at India's central bank. "We don't think this is a possibility because this could then create huge panic globally."
Our democratic allies in Europe are also dismayed. German commentary from across their political spectrum is deeply worried. The popular German newspaper Bild laments, "[W]hat America is currently exhibiting is the worst kind of absurd theatrics. And the whole world is being held hostage." British colleagues recently stated repeatedly how "embarrassed" they were for our country. It is truly embarrassing to have the British embarrassed for us, given the scandal swirling there.
An opinion piece in France's Le Monde warned that American politicians "whose only concern seems to be to evade their responsibility to pass the compromise to solve this budget mess" should "ponder the lessons of the pound sterling and the inexorable loss of influence of the British Empire." The editorial concludes that "American politicians supposed to lead the most powerful nation in the world are also becoming a laughing stock."
The United States is certainly not acting the part of a world leader. It is hard to imagine the conservative congressional leaders of our nation in 1950 or 1980 or 2000 coming anywhere near this close to wreaking havoc with the very system it set up and nurtured because it has allowed America, and countries around the world, to thrive.
Sadly, even if Washington manages to avert disaster, we will pay a price for this moment. The calls for a new international reserve currency, which gained momentum after the global financial crisis, are only going to get stronger. China and others will shift away from dollar-denominated assets as soon as they can. And another pillar of U.S. power will begin to erode.
The cost of this erosion of power, as well as the damage this crisis is doing to our leadership and credibility, is hard to measure. America could find it harder to muster worldwide support for all our goals, from Libya to currency reform to climate. And we will have to endure more satire like the recent report "China Puts US on eBay: ‘Government Sold Separately,' Sales Listing Says."
Ironically, it's the same right-wing choir that (falsely) accuses President Obama of not adequately embracing American exceptionalism that are pushing proposals with no chance of passage. Moreover, their proposals eviscerate diplomatic resources as well as domestic investments into future American greatness, thwarting our long-term ability to reclaim our role as an economic, political, and moral leader around the globe. They do not seem to understand that an exceptional future is what we need, not just an exceptional past.