If the debt crisis roiling Washington were eventually to send the United States crashing into recession, its economy would hardly sink alone.
The repercussions of a first-ever default on the federal debt would quickly reverberate around the world.
“No corner of the global economy will be spared” if the U.S. government defaulted and the crisis weren’t resolved quickly, said Mark Zandi, chief economist at Moody’s Analytics.
Zandi and two colleagues at Moody’s have concluded that even if the debt limit were breached for no more than week, the U.S. economy would weaken so much, so fast, as to wipe out roughly 1.5 million jobs.
And if a government default were to last much longer — well into the summer — the consequences would be far more dire, Zandi and his colleagues found in their analysis: U.S. economic growth would sink, 7.8 million American jobs would vanish, borrowing rates would jump, the U.S. unemployment rate would soar from the current 3.4 per cent to eight per cent and a stock-market plunge would erase $10 trillion US in household wealth.
U.S. President Joe Biden hosted debt limit talks with House Speaker Kevin McCarthy on Monday with no agreement reached. (Leah Millis/Reuters)
Of course, it might not come to that.
The White House and House Republicans, seeking a breakthrough, continue debt-limit negotiations. U.S. President Joe Biden met with House Speaker Kevin McCarthy Monday, with both describing their talks as “productive.”
Still, the Republicans have threatened to let the government default on its debts by refusing to raise the statutory limit on what it can borrow unless Biden and the Democrats accept sharp spending cuts and other concessions.
Potentially ‘cataclysmic’
So much financial activity worldwide hinges on confidence that the U.S. will always pay its financial obligations. Its debt, long viewed as an ultra-safe asset, is a foundation of global commerce, built on decades of trust in the United States. A default could shatter the $24 trillion US market for Treasury debt, cause financial markets to freeze up and ignite an international crisis.
“A debt default would be a cataclysmic event, with an unpredictable but probably dramatic fallout on U.S. and global financial markets,” said Eswar Prasad, professor of trade policy at Cornell University and senior fellow at the Brookings Institution.
The threat has emerged just as the world economy is contending with a panoply of threats — from surging inflation and interest rates to the ongoing repercussions of Russia’s invasion of Ukraine to the tightening grip of authoritarian regimes.
On top of all that, many countries have grown skeptical of America’s outsize role in global finance.
In the past, American political leaders generally managed to step away from the brink and raise the debt limit before it was too late.
Congress has raised, revised or extended the borrowing cap 78 times since 1960, most recently in 2021.
U.S. debt ceiling talks at an impasse
Weekend discussions between Republican House Speaker Kevin McCarthy and U.S. President Joe Biden failed to reach a deal to raise the debt ceiling, which some say is necessary to avoid a recession.
So what’s different this time?
The problem has worsened. Partisan divisions in Congress have widened while the debt has grown after years of rising spending and deep tax cuts. U.S. Treasury Secretary Janet Yellen has warned that the government could default as soon as June 1 if lawmakers don’t raise or suspend the ceiling.
“If the trustworthiness of [Treasurys] would become impaired for any reason, it would send shock waves through the system … and have immense consequences for global growth,” said Maurice Obstfeld, senior fellow at the Peterson Institute for International Economics and former chief economist at the International Monetary Fund.
Treasurys are widely used as collateral for loans, as a buffer against bank losses, as a haven in times of high uncertainty and as a place for central banks to park foreign exchange reserves.
Given their perceived safety, the U.S. government’s debts — Treasury bills, bonds and notes — carry a risk weighting of zero in international bank regulations. Foreign governments and private investors hold nearly $7.6 trillion US of the debt — roughly 31 per cent of the Treasurys in financial markets.
Because the U.S. dollar’s dominance has made it the de facto global currency since World War II, it’s relatively easy for the United States to borrow and finance an ever-growing pile of government debt.
The U.S. dollar remains strong around the world, and would continue to dominate despite a default, say economists. (Matt Slocum/The Associated Press)
Demand for the dollar
But high demand for U.S. dollars also tends to make them more valuable than other currencies, and that imposes a cost: A strong dollar makes American goods pricier relative to their foreign rivals, leaving U.S. exporters at a competitive disadvantage. That’s one reason why the United States has run trade deficits every year since 1975.
Of all the foreign exchange reserves held by the world’s central banks, U.S. dollars account for 58 per cent. No. 2 is the euro at 20 per cent. China’s yuan makes up under three per cent, according to the IMF.
Researchers at the Federal Reserve have calculated that from 1999 to 2019, 96 per cent of trade in the Americas was invoiced in U.S. dollars. So was 74 per cent of trade in Asia. Elsewhere outside of Europe, where the euro dominates, dollars accounted for 79 per cent of trade.
So reliable is America’s currency that merchants in some unstable economies demand payment in dollars, instead of their own country’s currency.
Consider Sri Lanka, battered by inflation and a dizzying drop in the local currency. Earlier this year, shippers refused to release 1,000 containers of urgently needed food unless they were paid in dollars. The shipments piled up at the docks in Colombo because the importers weren’t able to obtain dollars to pay the suppliers.
“Without [U.S. dollars], we can’t do any transaction,” said Nihal Seneviratne, a spokesman for Essential Food Importers and Traders Association. “When we import, we have to use hard currency — mostly the U.S. dollars.”
Likewise, many shops and restaurants in Lebanon, where inflation has raged and the currency has plunged, are demanding payment in dollars. In 2000, Ecuador responded to an economic crisis by replacing its own currency, the sucre, with dollars — a process called “dollarization” — and has stuck with it.
A general view of Hamra Street, in Beirut. Shops and restaurants in Lebanon regularly demand payment in U.S. dollars. (Hussein Malla/The Associated Press)
If the United States were to pierce the debt limit without resolving the dispute and the Treasury defaulted on its payments, Zandi suggests that the dollar will rise, at least initially, “because of the uncertainty and the fear. Global investors just wouldn’t know where to go except to where they always go when there’s a crisis and that’s to the United States.”
But the Treasury market would likely be paralyzed. Investors might shift money instead into U.S. money market funds or the bonds of top-flight U.S. corporations. Eventually, Zandi says, growing doubts would shrink the dollar’s value and keep it down.
Who would — and wouldn’t — get paid
In a debt-ceiling crisis, Lowery, who was an assistant Treasury secretary during the 2008 crisis, imagines that the United States would continue to make interest payments to bondholders. And it would try to pay its other obligations — to contractors and retirees, for example — in the order that those bills became due and as money became available.
For bills that were due on June 3, for example, the government might pay on June 5. A bit of relief would come around June 15. That’s when government revenue would pour in in as many taxpayers make estimated tax payments for the second quarter.
The government would likely be sued by those who weren’t getting paid — “anybody who lives off veterans’ benefits or Social Security,” Lowery said. And ratings agencies would likely downgrade U.S. debt, even if the Treasury continued to pay interest to bondholders.
The debt ceiling drama is sure to heighten questions about the enormous financial power of the United States and the dollar.
“The global economy is in a pretty fragile place right now,” Obstfeld said. “So throwing into that mix a crisis over the creditworthiness of U.S. obligations is incredibly irresponsible.”
In the roughly 250 years since the Industrial Revolution the world’s population, like its wealth, has exploded. Before the end of this century, however, the number of people on the planet could shrink for the first time since the Black Death. The root cause is not a surge in deaths, but a slump in births. Across much of the world the fertility rate, the average number of births per woman, is collapsing. Although the trend may be familiar, its extent and its consequences are not. Even as artificial intelligence (ai) leads to surging optimism in some quarters, the baby bust hangs over the future of the world economy.
In 2000 the world’s fertility rate was 2.7 births per woman, comfortably above the “replacement rate” of 2.1, at which a population is stable. Today it is 2.3 and falling. The largest 15 countries by GDP all have a fertility rate below the replacement rate. That includes America and much of the rich world, but also China and India, neither of which is rich but which together account for more than a third of the global population.
The result is that in much of the world the patter of tiny feet is being drowned out by the clatter of walking sticks. The prime examples of ageing countries are no longer just Japan and Italy but also include Brazil, Mexico and Thailand. By 2030 more than half the inhabitants of East and South-East Asia will be over 40. As the old die and are not fully replaced, populations are likely to shrink. Outside Africa, the world’s population is forecast to peak in the 2050s and end the century smaller than it is today. Even in Africa, the fertility rate is falling fast.
Whatever some environmentalists say, a shrinking population creates problems. The world is not close to full and the economic difficulties resulting from fewer young people are many. The obvious one is that it is getting harder to support the world’s pensioners. Retired folk draw on the output of the working-aged, either through the state, which levies taxes on workers to pay public pensions, or by cashing in savings to buy goods and services or because relatives provide care unpaid. But whereas the rich world currently has around three people between 20 and 64 years old for everyone over 65, by 2050 it will have less than two. The implications are higher taxes, later retirements, lower real returns for savers and, possibly, government budget crises.
Low ratios of workers to pensioners are only one problem stemming from collapsing fertility. As we explain this week, younger people have more of what psychologists call “fluid intelligence”, the ability to think creatively so as to solve problems in entirely new ways .
This youthful dynamism complements the accumulated knowledge of older workers. It also brings change. Patents filed by the youngest inventors are much more likely to cover breakthrough innovations. Older countries—and, it turns out, their young people—are less enterprising and less comfortable taking risks. Elderly electorates ossify politics, too. Because the old benefit less than the young when economies grow, they have proved less keen on pro-growth policies, especially housebuilding. Creative destruction is likely to be rarer in ageing societies, suppressing productivity growth in ways that compound into an enormous missed opportunity.
All things considered, it is tempting to cast low fertility rates as a crisis to be solved. Many of its underlying causes, though, are in themselves welcome. As people have become richer they have tended to have fewer children. Today they face different trade-offs between work and family, and these are mostly better ones. The populist conservatives who claim low fertility is a sign of society’s failure and call for a return to traditional family values are wrong. More choice is a good thing, and no one owes it to others to bring up children.
Liberals’ impulse to encourage more immigration is more noble. But it, too, is a misdiagnosis. Immigration in the rich world today is at a record high, helping individual countries tackle worker shortages. But the global nature of the fertility slump means that, by the middle of the century, the world is likely to face a dearth of young educated workers unless something changes.
What might that be? People often tell pollsters they want more children than they have. This gap between aspiration and reality could be in part because would-be parents—who, in effect, subsidise future childless pensioners—cannot afford to have more children, or because of other policy failures, such as housing shortages or inadequate fertility treatment. Yet even if these are fixed, economic development is still likely to lead to a fall in fertility below the replacement rate. Pro-family policies have a disappointing record. Singapore offers lavish grants, tax rebates and child-care subsidies—but has a fertility rate of 1.0.
[embedded content]
Unleashing the potential of the world’s poor would ease the shortage of educated young workers without more births. Two-thirds of Chinese children live in the countryside and attend mostly dreadful schools; the same fraction of 25- to 34-year-olds in India have not completed upper secondary education. Africa’s pool of young people will continue to grow for decades. Boosting their skills is desirable in itself, and might also cast more young migrants as innovators in otherwise-stagnant economies. Yet encouraging development is hard—and the sooner places get rich, the sooner they get old.
Eventually, therefore, the world will have to make do with fewer youngsters—and perhaps with a shrinking population. With that in mind, recent advances in ai could not have come at a better time. An über-productive AI-infused economy might find it easy to support a greater number of retired people. Eventually ai may be able to generate ideas by itself, reducing the need for human intelligence. Combined with robotics, ai may also make caring for the elderly less labour-intensive. Such innovations will certainly be in high demand.
If technology does allow humanity to overcome the baby bust, it will fit the historical pattern. Unexpected productivity advances meant that demographic time-bombs, such as the mass starvation predicted by Thomas Malthus in the 18th century, failed to detonate. Fewer babies means less human genius. But that might be a problem human genius can fix. ■
For subscribers only: to see how we design each week’s cover, sign up to our weekly Cover Story newsletter.
Statistics Canada reported Wednesday real gross domestic product grew at an annualized rate of 3.1 per cent in the first quarter of 2023.
That growth beat out the federal agency’s own forecast of 2.5 per cent for the quarter. A preliminary estimate suggests the economy expanded by 0.2 per cent in April after remaining flat in March.
The Canadian economy has managed to continue outperforming expectations, despite the Bank of Canada hoping high interest rates would cause a more profound pullback by consumers and businesses.
“It is a little surprising the resilience, I would say, of the Canadian consumer … just given the amount of interest rate hikes that had been put in place over the course of the previous year,” said Dawn Desjardins, chief economist at Deloitte.
The Bank of Canada’s key interest rate sits at 4.5 per cent — the highest it’s been since 2007.
The ongoing resilience in the economy is raising the odds of another rate hike, economists say, as the Bank of Canada heads toward its upcoming interest rate decision next week.
“The run of sturdy data undoubtedly raises the odds that the Bank of Canada needs to go back to the well of rate hikes, and even puts some chance on a move as early as next week’s policy decision,” BMO chief economist Douglas Porter said in a client note.
But Porter, along with other commercial bank economists, say that the central bank may delay the decision to raise rates again until the summer.
“However, given the uncertain backdrop and the possibility that inflation took a big step down in May, the Bank of Canada could opt to remain patient for a bit longer and signal that it’s open to hiking in July if the strength persists.”
The federal agency says growth in exports and household spending helped spur growth in the first quarter.
Meanwhile, slower inventory accumulations as well as declines in household investment and business investment in machinery and equipment weighed on growth.
The household spending figures show spending up on both goods and services in the first three months of the year, after minimal growth in the previous two quarters.
However, Statistics Canada noted that disposable income fell for the first time since the fourth quarter of 2021. The federal agency says disposable income declined by one per cent, largely due to the expiration of government measures aimed at helping people cope with inflation.
The combination of higher spending and lower income has pushed down the household saving rate.
Economists have been struggling to get a read on the economy as data has proven to be volatile. Desjardins says converging forces, from the COVID-19 pandemic to changing demographics to population growth, are to blame.
“There are a lot of things that are changing within the economy. And it does make it very challenging to really zero in on what is that one factor that is driving this growth, or is going to be the one that’s going to drive us into a much slower growth trajectory,” Desjardins said.
Forecasters were previously expecting the Bank of Canada’s aggressive rate-hiking cycle, which began in March 2022, to push the economy into a recession as early as the end of 2022.
Those predictions have turned out to be too pessimistic, but economists like Desjardins are still counting on a slowdown this year.
“I do think that households are going to start to feel the squeeze,” she said.
How bad the squeeze will be will depend on how hard the labour market is hit, Desjardins said. So far, the jobs market has kept its steam as the unemployment rate hovers at five per cent, just above the all-time record-low of 4.9 per cent.
The central bank paused its rate-hiking cycle earlier this year to account for the lag that typically exists between changes to interest rates and the effects on the economy.
But the central bank’s governor, Tiff Macklem, has signalled that the bank is still trying to figure out if interest rates are high enough to quash inflation.
The headline inflation rate ticked up slightly to 4.4 per cent in April, remaining well above the central bank’s two per cent target. It’s still expected to decline further this year, but economists and the Bank of Canada worry the journey back to two per cent inflation may take longer than they would hope for.
This report by The Canadian Press was first published May 31, 2023
If you are a God-fearing, gun-toting patriot, conservative companies are hungry for your business. If Google and YouTube have become too woke for you, consider ditching them for Tusk and Rumble. Before paying your monthly AT&T bill, you might want to switch to Patriot Mobile, the nation’s one-and-only Christian conservative wireless network. Rather than fruitlessly scouring Hinge for fellow right-wingers you can now make a profile on the Right Stuff, a dating app that helps users get to know each other by eliciting responses to prompts like “January 6th was” or “favourite liberal lie”. To get java roasted by veterans, consider sipping on Black Rifle Coffee’s “Silencer Smooth” (light roast), “AK-47” (medium roast), or “Murdered Out” (extra dark roast). And to protest against Hershey honouring a transgender activist on international women’s day, you can instead buy Jeremy’s Chocolate, where the HeHim bar contains nuts and the SheHer one is unequivocally nutless.
And that’s just the beginning. PublicSq, an online marketplace, is home to 40,000 firms devoted to freedom, the family unit and the constitution. Click through and you can find skin care and artisan jerky, probiotics, banks, app developers and accountants. The businesses listed hope to capture the hearts and wallets of as many as 100m patriots, who together, according to Michael Seifert, PublicSq’s founder, make up “the third-largest economy in the world by GDP”. Its CEOs, sellers and most avid customers dream of a parallel economy where conservatives need never buy from liberals. Is such a vision feasible?
Today’s populist Republicans have jettisoned many classical conservative values, but their departure from a decades-long alliance with America’s corporations is one of the most notable rebellions. “Old-fashioned corporate Republicanism won’t do in a world where the left has hijacked big business,” Ron DeSantis, Florida’s governor, recently wrote. The backlash came after Disney condemned Florida’s so-called “Don’t Say Gay” bill, Google halted midterm donations from candidates who had refused to certify Joe Biden’s 2020 win and Delta, Coca-Cola and Microsoft denounced new voting laws in Republican states. Some argue that these public displays of liberal values go beyond economic self-interest. When researchers at the University of Chicago analysed every S&P 500 company tweet since 2011, they found that over time statements from companies and Democratic politicians came to sound more and more alike (see chart).
With big business on Republican hit-lists, entrepreneurs saw an opening. The parallel economy has two major draws. For consumers, it offers the opportunity to buy from firms that reflect their values. Surveys show that Americans want brands to get political and would sometimes even pay a premium for products if they did. For firms, politically aligned suppliers serve as an insurance policy. Businesses can be burnt when companies they rely on back out over politics. Parler, a far-right social network, was paralysed when Amazon pulled its web-hosting services and Apple and Google dropped it from their app stores after January 6th 2021. The withdrawal came just as Twitter froze Donald Trump’s account and his army of apostles were hungry for a fresh platform. Politically aligned backend firms would ensure business opportunities are not missed.
Companies are quickly learning that building viable alternatives to common products—and pulling patrons from big-shot firms—is hard. Writing and maintaining code to run Google and YouTube is so costly that no small startup could hope to compete. For services like Facebook and Tinder, the value is vastly improved with more participants. For these reasons many of the conservative tech firms are fizzling out. Tusk and Rumble have little-to-no name recognition outside far-right circles. Downloads of Truth Social, Donald Trump’s social-media site, are dwindling; its stock price has plummeted since last year. The Right Stuff captured over 50,000 hopeful singles in the two months after its debut, but has barely attracted more since (women are especially lacking). Its seed money from Peter Thiel, a libertarian billionaire, runs out this summer.
Others hope to entice customers by not only pledging devotion to conservative values, but by actually getting their hands dirty. Last spring Patriot Mobile, the wireless network, found and funded 11 candidates to run for school boards in the Fort Worth suburbs. Their $600,000 propelled each to victory, flipping four boards, one of which has since pulled “The Diary of Anne Frank” and LGBTQ-themed novels off library shelves. But patrons who came for phone services are frustrated by the inattention to them, saying in reviews that the firm’s poor customer service is “NOT what Jesus would do!” and claiming the management is so bad “they run it like Biden”.
MyPillow’s founder, Mike Lindell, a conspiracy-theorist, also privileged politics over product. After Dominion, a voting-machine maker, sued him for spreading false claims about election rigging, Costco, Bed Bath & Beyond, Wayfair and more than a dozen other stores stopped stocking his pillows. The company lost $65m because of it, Mr Lindell says.
A third genre of firm, which works to strengthen conservative hotbeds, may be more of a hit. According to its CEO, Conservative Move, a property broker that helps clients sell their house in a Democratic state and buy in a Republican one, has moved “tens of thousands” of people to new neighbourhoods since 2016. Revenue at RedBalloon, a job board that helps workers escape “woke” firms and get hired at right-leaning ones that, for example, respect employees’ right to be unvaccinated, grew by 90% in the first quarter of 2023. (The company’s founder bought the domain RedBalloon.work because .com “sounded too much like communist”.)
This is not Americans’ first shot at a parallel economy. Forced out of local shops during the Jim Crow era, black people built independent commercial districts. Community leaders spoke of using the “double-duty dollar” at black-owned shops to simultaneously purchase goods and support their own. Later, in the 1970s, a band of lesbians tried to withdraw from the “male economy” with the utopian goal of creating a labour market void of husbands.
Separate yet together
Neither group achieved the self-sufficiency they dreamed of. In the South money was sparse and discrimination was not: black businessmen sold flour and dresses, but lacked the means and connections to open car dealerships or banks. Some feminist firms were lucrative at first—a record company and printing press led the way—but over time sales suffered, pioneers’ energy waned and money dried up. Today’s conservatives have better access to capital than past separatists, and may be greater in number. But the movement uses old strategies that failed in the past, says Lizabeth Cohen, a historian at Harvard University.
Not long ago Brave Books, an anti-woke children’s-book publisher, came out with “Elephants are Not Birds”, the tale of an elephant who, egged on by Culture the vulture, yearns to be a bird. Culture fits him with a beak and some clip-on wings, but after a demoralising attempt to fly the elephant learns that it is not his feelings that dictate who he is, but rather his body. The children who will be read this book may live in Republican states that bar transgender athletes from playing school sports, ban abortions and allow their parents to carry unlicensed pistols. But when Dad finishes reading the story he may just jump in his Jeep to pick up dinner from Shake Shack. When he gets home with food everyone will snuggle onto the IKEA couch to watch a Netflix film. Mom will probably open a pint of her favourite Ben & Jerry’s. Even if it feels as if everything else is becoming more polarised, for now, Americans are still bound by what they buy.■
Stay on top of American politics with Checks and Balance, our weekly subscriber-only newsletter, which examines the state of American democracy and the issues that matter to voters.
