There are still three days left before the United States potentially defaults on its debt thanks to a congressional stalemate, but fallout from the threat of default has already begun to spread.
United States Treasury Secretary Jacob J. Lew described the problem: “With the deepest and most liquid financial markets, when risk rises, the flight to safety and to quality brings investors to U.S. markets. But the United States cannot take this hard-earned reputation for granted.”
Here are five signs that this reputation is already taking a hit.
1) The stock market. U.S. stocks plunged Monday morning after Republicans and Democrats were unable to come to an agreement over the weekend to end the government shutdown and raise the debt ceiling, even temporarily.
2) Our emboldened rivals. The official government news agency in China said that, due to the governmental dysfunction in the United States, the rest of the world should consider “a de-Americanised world.”
3) A devalued dollar. There is a lot of talk about the possible effect on the U.S. dollar after a default, but Monday’s early financial reports show its value sliding.
4) Nothing else is getting done. Over the weekend, economic leaders from all over the world met in Washington to talk about international recovery (really!), but the news from D.C. destroyed any optimism.
5) Higher borrowing costs. At the meeting, leaders at the World Bank and IMF insisted that "even a near-default would lead to higher borrowing costs and a slowdown of the global economy." In other words, "higher rates on government debt would raise other borrowing costs, including mortgage rates."
Do you think the U.S. could really default on its debt this week? Let us know in a blog post or a comment.