I wouldn’t have wanted to be U.S. treasury secretary Janet Yellen this past week.
Secretary Yellen is responsible for the finances of the world’s biggest economy, responsible for the world's reserve currency. It fell to her to explain why its government was behaving like a bunch of schoolchildren.
When she arrived at the G7 finance meeting in Japan, she had to pretend that the U.S. government wasn’t putting the global economic order at risk… when her counterparts in attendance knew perfectly well that it was.
The elephant in the room was the looming possibility of a default on U.S. sovereign debt.
The debt in question consists of Treasury bills and bonds. Secretary Yellen’s department issues these instruments to raise money to pay for the various activities and programs of the federal government, including interest service on previously issued debt.
Treasury bonds are considered the world’s safest asset after gold. It’s not an exaggeration to say that the entire global financial system rests on a Treasury foundation.
Millions of financial contracts big and small all over the world specify Treasurys as collateral. Failure to honor U.S. debts would make the value of this collateral suspect, instantly freezing the global financial system.
The consequences of this type of crisis would be far more severe than the global financial meltdown of 2008-2009.
Without a functioning Treasury bond market, the Fed couldn’t provide support to U.S. and foreign banks. Even if the government resolved the issue after a brief period of default, confidence in the U.S., in Treasury bonds—even in the dollar itself—would never recover.
The fallout would make the collapse of U.S. regional banks in recent months seem like a pleasant day at the park.
That wasn’t the only evidence of severe U.S. government dysfunction Yellen had to explain to the G7.
For years, the U.S. has been trying to convince the global community to establish a 15% corporate minimum tax. Without it, countries compete to reduce corporate taxes to attract investment and global capital flows. That severely distorts global financial markets and undermines business accountability to sovereign governments and their citizens.
In 2021, 140 countries agreed to the 15% corporate minimum tax. Whilst most signatory nations have ratified the agreement and are practicing it, however, the U.S.—its main proponent—hasn’t.
Senate Republicans, along with Senator Joe Manchin (D-WV), dislike treaty provisions they say would hurt U.S. business. But without the global agreement, foreign countries would almost certainly impose severe penalties on U.S. businesses operating within their borders.
The U.S. and its citizens derive enormous benefits from the faith other countries place in our economy and our ability to manage it appropriately. Without that faith, our economy would be far smaller, and we’d pay much higher prices for goods and services.
Secretary Yellen had to explain to the global community why the U.S. seems to be on the verge of throwing all this away… especially when many observers believe the only thing stopping the Chinese currency from superseding the dollar is the perceived stability of U.S. policy.
Not much more than a century ago, the U.S. was a regional power, rising but still secondary to Europe. By the mid-20th century, it had become the world's preeminent superpower. It did this by leading itself responsibly, and demonstrating to other countries how a free democracy should work. This is what made U.S. citizenship so desirable to millions around the world.
If the U.S. defaults on its debt in the next few weeks, that attraction will be seriously compromised. Hopefully, other countries will step into the breach. But a more likely outcome is that the world will fragment into regional communities, with differing approaches to economics, politics, and freedom.
Based on the number of Americans seeking foreign citizenship in the last few years, it seems as if that tide is already beginning to turn.
Ted Baumann is International Living’s Chief Global Diversification Expert. He's traveled to nearly 90 countries and is a dual citizen of the United States and South Africa. Ted has been published in international research journals, as well as in media outlets such as Barrons, Forbes, and Cheddar. Learn more about Ted Baumann here.