Former U.S. Secretary of State Hillary Clinton has recently warned that the U.S. defaulting on its debt obligations could contribute to a worldwide financial meltdown. The risk of the dollar losing its status as the world’s reserve currency would be among the disastrous outcomes of such a default, she noted. In an opinion piece published by The New York Times, Clinton explained that the debate over the debt ceiling is about Congress paying its already-incurred debts, and she likened a default on these obligations to skipping out on a mortgage. The former secretary of state pointed out that the centrality of the dollar in the global economy increases the consequences of debt default, saying, “Because of the central role of the United States and the dollar in the international economy, defaulting on our debts could spark a worldwide financial meltdown.”
The consequences of debt may be felt well beyond American borders too, as the competition between democracies and autocracies continues to grow intense. By undermining the credibility and pre-eminence of the dollar, the debt ceiling debate might just be playing into the hands of China’s Xi Jinping or Russia’s Vladimir Putin, Clinton warned.
In international transactions conducted by people, companies, and governments worldwide, the USD-based trade settlement system has continued to play a central role. People invest in U.S. Treasury bonds, and U.S. banks and institutions are trusted because America pays its debts, upholds the rule of law, and guarantees stability — or so the assumption goes. The power over imposing sanctions, such as those against Iran and Russia, comes with this trust, and Clinton suggested that the dollar’s pre-eminent position in the global economy provides the U.S. with tremendous power potential.
However, engaging in games with the debt ceiling can imperil the power that the dollar provides to the United States. Calls for dethroning the dollar as the world’s reserve currency could grow stronger outside of the US, according to Clinton, should Congress continue to flirt with debt default. As the former first lady put it, countries worldwide would begin to start “hedging their bets.”
Clinton’s warning over the consequences of the U.S. defaulting on its debt obligations comes at a time when a growing number of countries are ramping up efforts to shift away from using U.S. dollars in trade settlements. ASEAN countries have reportedly taken steps to reduce their reliance on the U.S. dollar for trade settlements, and the BRICS nations are rumored to be creating a new currency that will reduce their dependence on the USD. Such efforts could only intensify if the U.S. defaults on its debts.
As countries shift away from the dollar and hedge their bets, Bitcoin and other cryptocurrencies continue to gain mainstream attention. These digital assets offer an alternative store of value and a decentralized system for conducting transactions that could change the dynamics of the traditional USD-centric global economy.
Clinton’s warning about debt default highlights the importance of the stability of the dollar, but it also draws attention to potential alternatives as countries worldwide begin to consider their options. While the potential consequences of debt default are dire, they could also usher exciting developments for the digital asset ecosystem.