The Writing is on the Wall for the US and the Dollar
By the time you read this, you may know the answer. Supposedly, the financial world is about to be hit by a disaster, namely an imminent US default, or the politicians will avert it with a last-minute deal. Both these views are misplaced.
Roger Bootle, 3st July 2011, Daily Telegraph

First of Many?
This article was the first we had seen arguing that whatever happened by the 2nd August 2001 "default deadline", the financial world, and the paramount importance and pre-eminence of the US dollar, is probably about to change, not with a big bang, but slowly and surely.
We saw the second such comment (Monetary Reform: The Beginning Of The Beginning) later the same day. We believe both are well argued, and will turn out to be well-founded forecasts.

The writing is on the wall for the US and the dollar
By the time you read this, you may know the answer. Supposedly, the financial world is about to be hit by a disaster, namely an imminent US default, or the politicians will avert it with a last-minute deal. Both these views are misplaced.
'Like the British Empire, the American imperium will not end in a flash but rather fade away'
By Roger Bootle 7:29PM BST 31 Jul 2011

Even if Congress does not come up with a deal by Tuesday, America will not immediately default on its debt. And if it does come up with a deal, this will not solve the fundamental problem, which continues to look worse and worse. One way or another, the US is heading for a reckoning.
The August 2 deadline emerges simply from estimates of the expected flows of Treasury revenues and payments. Much like those doomsayers who repeatedly revise their forecasts of when the world will end, the US Treasury may yet find it has some more breathing space.
And even if the US government does hit its formal debt ceiling on Tuesday, I'd be surprised if it doesn't have a few tricks up its sleeve to enable it to meet its obligations for a little longer. These may involve technical sleights of hand like the issue of IOUs, which somehow don't count as debt, or some arrangement with the Federal Reserve.
Even once all avenues have been exhausted, any money the Treasury has will be used to pay the interest on government bonds first, thereby preventing a default. America has been here before. In 1995/96 there were two Federal government shutdowns; "non-essential" services were suspended but the government continued to service its debts.
Mind you, if the government did actually fail to make its scheduled non-interest payments for any length of time, the consequences could be major. People would go short of pension or benefit payments, or whatever. Moreover, there would be widespread uncertainty and anxiety. Spending would inevitably suffer. It would be a form of forced fiscal tightening. You do not have to be Ed Balls to recognise that this would depress the economy.
If the US defaulted on its debt payments, however, the consequences could be much worse. Borrowing costs would surge, the interbank markets would freeze up, banks' capital would be eroded, and the dollar would probably fall. We could have another major financial crisis on our hands.
If this prospect seems far-fetched, the prospect of a downgrade to America's credit rating should not. It could happen this week – whether or not the debt ceiling is raised. After all, America's underlying fiscal position is poor.
In 2010, the combined US Federal, state and local government deficit was 11pc of GDP, marginally higher than Greece. Moreover, US net debt was 70pc of GDP and, according to the independent Congressional Budget Office, by 2021 it will hit 90pc. It could easily go higher. The UK's ratio was 60pc, and will probably peak below 80pc.
Some fear a credit downgrade would itself bring on armageddon. I think this is seriously overblown. A downgrade to AA would still imply that the US had, in the words of Standard & Poor's, "an extremely strong capacity" to repay its debt. And there are plenty of countries in the AA category – such as Japan, New Zealand and China – that are clearly not "basket cases".
In practice, if US debt were rated "only" AA, very few institutions would be prevented from holding it. And the desire to hold it is about much more than credit risk – especially when benefiting from the world's most liquid asset market. Moreover, as the Australian and Canadian examples attest, once an AAA credit rating is gone, it's not necessarily lost for good.
Nevertheless, the fact that raising the debt ceiling has been pushed to the wire indicates a deeper problem, namely that America is a profoundly divided country. The Democrats want to bridge the funding gap with some spending cuts but also higher taxes, while the Republicans oppose any tax rises and want only deep spending cuts. More importantly the political system seems designed to perpetuate indecision rather than solution. Whoever wins eventually, if the US is to overcome its fiscal problem, there will have to be a major fiscal tightening. Just as in the UK, this will hold back economic recovery.
For several decades, the US has been the global hegemon and its currency the foundation of the world's financial system. The writing is on the wall for both. Like the British Empire, the American imperium will not end in a flash but rather fade away. Coming hard on the heels of the financial crisis of 2008, a US default, even if it was merely technical, would be a clear signal to the world.
The loss of America's AAA credit rating would be much less momentous. Even so, future historians might well conclude it was an important marker during the process that saw power and prestige leaching, ineluctably, from West to East.
Roger Bootle is managing director of Capital Economics and economic adviser to Deloitte