After the COVID-19 pandemic, and the first major war in Europe since 1945, the specter of the American government being unable to pay its bills is now stalking financial markets.
“If the credibility of the Treasury’s commitment to pay comes into question, it can wreak havoc across a range of global markets,” said Maurice Obstfeld, non-resident senior fellow at the Peterson Institute for International Economics, a think tank in Washington. Fitch has already placed America’s triple-A credit rating, its highest score, on watch for a possible downgrade because of the political brinkmanship.
Such a “war room” does exist at JPMorgan Chase. CEO Jamie Dimon told Bloomberg earlier this month that the bank was holding weekly meetings to prepare for a possible US default and that by May 21 he expected to meet every day. Economists at Moody’s Analytics think that even in the event of a breach lasting no more than a week, US gross domestic product would decline by 0.7 percentage points and 1.5 million jobs would be lost. Writing in a paper this month, they assigned a 10% probability to a breach, adding that it is most likely to be a short one.
Investors, who traditionally buy up Treasuries in times of crisis, could dump them and turn to cash instead. The last time that happened, when the coronavirus pandemic was unfolding in March 2020, the Federal Reserve had to take extraordinary measures to avoid a full-blown liquidity crisis. Between 1999 and 2019, the dollar accounted for 96% of trade invoicing in the Americas, 74% in the Asia-Pacific region and 79% in the rest of the world, according to the Fed.
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