The United States Has Already Lost

Even if an agreement is reached by August 2, which is when payments will have to be suspended, the image of the United States as the almighty head of the global economy has already suffered almost irreparable damage.

As Barack Obama said during his speech on Monday night, this situation is “leaving investors around the world to wonder whether the United States is still a good bet.”

Despite the availability of more profitable investments, both markets and foreign governments trust the United States because nothing beats the greatest economy in the world and the primary holder of the internationally dominant currency. Furthermore, it is a country that serves as a model of political stability, having a solid system of government and a unified, well-structured society.

Its status as the economic leader started to be threatened long ago by China, which, alongside Brazil and other emerging economies, is starting to challenge the dollar. However, no one has questioned the political status of the United States. Until now.

The management of the debt ceiling crisis has been heavily influenced by ideology and short-term interests, and it has alerted many about the danger of a dysfunctional American political system. It does not matter if this situation was caused by the election to Congress of the boldest, most conservative and most isolationist group in decades. The whole country is suffering the consequences, including President Barack Obama, whose leadership may be seriously affected.

The strength of the U.S. president matters not only in domestic elections, but also in the development of multiple ongoing crises in places like Syria, Libya, Pakistan and Iran. Although the machinery of Obama’s administration has not stopped, the U.S. has politically distanced itself from the world for at least 15 days, and it may return considerably weakened by this domestic battle.

Additionally, this situation may have more immediate and specific consequences. Come what may, the main potential consequence is that for the first time in history, the rating agencies might downgrade the U.S.’ AAA credit rating. This will cause interests to shoot up and aggravate the deficit problem even further. Both Standard & Poor’s and Moody’s have warned that the downgrade is likely to happen.

There are few consolations to be found in a crisis like this. One might be the fact that investors don’t have a wide range of alternatives with which to replace the U.S. Another is that, as a result of this traumatic incident, both the deficit and the debt may be seriously addressed in the future.