October 08, 2013
According to the Washington Post, a debt default would have some clearly positive outcomes. Specifically it told readers that it would weaken the United States position as a financial safe haven for the rest of the world.
This would have two beneficial effects. If less money flowed from elsewhere in the world to the United States this would reduce the value of the dollar relative to other currencies. This has in fact been a stated goal of both the Bush and Obama administration, which both claimed that they wanted to end “currency manipulation.” Currency manipulation means that other countries are deliberately buying up dollars to raise the value of the dollar against their own currency.
The effort to end currency manipulation is an effort to lower the value of the dollar. If investors stop buying dollars because it is no longer a safe haven, then this would lower the value of the dollar in the same way that if foreign central banks stopped buying dollars to “manipulate” the value of their currency, it would lower the value of the dollar. In other words, people who would applaud the end of currency manipulation should also applaud the ending of the dollar as the world’s safe haven currency.
The other positive part of this story is that such a shift would lead to a downsizing of the financial industry in the United States. This would allow the resources in the sector to be reallocated to more productive sectors of the economy. It would also reduce the power of the financial industry in American politics.
A debt default may still be a bad story, but the vast majority of people in the United States have little to fear from the ending of the dollar as a safe haven currency.
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