What happens when the X-date arrives?

Even if the US defaults, credit rating agencies would likely downgrade the debt slowly, and most investors presume that the US would raise its debt ceiling in the near term, Lipsky added.


When Congress got stuck in political gridlock over the debt ceiling in 2011, Treasury prices actually rose as investors sought safe assets, even though US Standard & Poor’s downgraded the US credit rating from AAA to AA+ over concerns about a potential default. Fitch Ratings and Moody’s Investors Service kept the triple-A rating for US debt, but said the country was in danger of a possible downgrade.

Fitch’s global head of sovereign debt ratings, James McCormack, told CNN in March that the agency would consider a downgrade to US debt if global financial markets started to question the dollar’s role as the global reserve currency. But as Lipsky makes clear, it may be impossible for global investors to give up on US debt and the US dollar in the near term.


Default would still be a terrible, self-inflicted wound

It’s difficult to predict what will happen when the US runs out of cash on hand to pay its bills. It’s likely that the US would continue to pay its debts to other countries, and default on obligations to its citizens, so that the global financial system would continue functioning, Lipsky said.


In a scenario where the US keeps paying the coupon on its debt and cuts other spending, global investors would still flock to US Treasurys, but the most vulnerable Americans would no longer receive government support. Veterans, the elderly, and the disabled could all lose benefits, and the US would likely enter a recession, according to White House forecasts.

This depends on how long negotiations continue while the US is in breach of the debt limit. If the gridlock in Washington drags on, then there is potential for even greater economic damage, such as a global recession.


“The takeaway people should have from this chart is that we have an extraordinary privilege in the United States of being the issuer of so much of what the world wants—this safe asset,” Lipsky said. “So to flirt with disaster and damaging that [reputation] is just a terrible decision.”

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