Great Powers Don’t Default

I just sent letters to two Republican Congressman (6th and 8th districts in Wisconsin) as well as to both Wisconsin Senators regarding raising the debt ceiling independent of future plans for spending and taxation. Below the letter, I’ve included some information regarding foreign holdings of US securities, both private and public. Feel free to copy and distribute.

Here’s the letter:

Dear Congressman G,

In an April 27, 2023 paper in Foreign Affairs entitled “Great Powers Don’t Default”, former Deputy National Security Advisor (2019 to 2021) Matthew Pottinger and his colleague Daleep Singh argue that “If Congress fails to raise the debt limit now, it will impair American power at a time when China and Russia are looking to exploit every weakness they can.” 

They note that the debt ceiling legislation was created to enable the Treasury department to meet commitments without having to ask Congress for permission to issue bonds each time spending  exceeded available funds.  Thus, the purpose of the debt ceiling was to ensure that Treasury could meet, in a timely fashion, Congress’s spending commitments.  Use of the debt ceiling to address future spending is inconsistent with Congress’s intent when it passed the law.

Furthermore, they argue that “Since 1960, Congress has raised the debt limit 78 times, in most cases under a Republican president…No one should underestimate the stakes involved:  U.S. dollar primacy is a national treasure. The strength of the dollar…has, at least so far, conferred on the United States the unique capacity to absorb a shock, such as the 2011 downgrade of the United States’ credit rating, without seeing the country’s borrowing costs rise or U.S. currency fall in value.”

“Dollar primacy is nothing more than a network rooted in trust, habit, and assumed lack of alternatives. All systems based on trust have tipping points, often psychological ones that are impossible to identify in advance.”

Of course, trust is undermined by actions such as violating section four of the Fourteenth Amendment to the U.S. Constitution, which states that “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

In a March 9, 2023 opinion piece, economists Mary Lovely and Katherine Russ also make the case that defaulting reduces national security.

“There are few things that undermine people’s confidence in a partner’s stability and goodwill more than getting stiffed.  US bonds have been the world’s premier safe asset for decades, largely due to our reliable repayments, allowing us to borrow from domestic and overseas investors at highly favorable terms even at times of national crisis, such as the 2008 global financial crisis or the recent Covid-19 pandemic.”

“In short, failure to raise the debt limit would weaken our national security because it is precisely the world’s trust and confidence that the United States government will pay its debts in full and on time that helps keep the dollar as the world’s dominant currency. The danger of a US default goes well beyond global finance.  Undermining trust in the US would set back any efforts to make our supply chains more secure and resilient.  Stronger partnerships with Europe and countries in the Indo-Pacific are central to American efforts to reduce reliance on China for critical supplies.”

Pottinger and Singh conclude that the Treasury Department has some unilateral options it might employ, but they reject them as “Pulling from a bag of tricks to pretend the country is honoring its obligations.”  This “is not what great powers do.  It is a clownish display rather than a confident show of readiness for global competition.”


Marty Finkler

As noted above, here are a few relevant facts about foreign holdings of US securities, as of June 2022, according to the US Department of Treasury:

Foreign entities (governments and private individuals) held almost $25 trillion of US securities.

Almost half of those holdings were in the form of equities on US stock exchanges.

Foreign entities held $7.4 trillion of US Treasury securities, 30% of all publicly held US debt.

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