What a debt default would mean for national security

Over the past several years, American political leaders have rightly focused on augmenting national power. Faced with China’s geopolitical challenge, Washington has boosted its defense budget, stimulated domestic innovation, built new international partnerships, and moved to protect its technological lead. These steps have won broad support in both parties and across very different presidential administrations, and for good reason: A more powerful United States, working ever more closely with likeminded partners, is best placed to engage in long-term competition with Beijing.

In this context, the possibility of a default on U.S. debt — which Treasury Secretary Janet Yellen warns could occur as soon as June 1 — seems utterly mystifying. Defaulting on the nation’s debt threatens catastrophic economic consequences and would seriously harm national security. It’s hard to think of a single American action that would more effectively reduce its global standing, influence and power — and boost those of its chief competitor.

The economic consequences of a default are real and well-rehearsed. An inability to pay federal bills would roil financial markets and likely tip the United States into recession. It would increase interest rates and borrowing costs. It would harm American credibility, encourage diversification away from U.S. bonds, and threaten the dollar’s role as the world’s preeminent reserve currency. Military strength and geopolitical influence rise and fall with a country’s economic power, and a debt default would strike a major blow against them all.

It would also degrade America’s ability to effectively employ its foreign policy tools. The dollar’s extensive use to settle accounts gives Washington extensive powers to impose financial sanctions. By undermining confidence in the dollar, a default would likely encourage countries to denominate trade and financial transactions in other currencies, and to hold non-dollar official reserves as well. Already, Beijing has encouraged its trade partners to invoice in renminbi and is developing an alternative to the dollar-dominated SWIFT financial messaging network. Such moves would erode Washington’s ability to impose the kind of economic sanctions it applied after Russia’s invasion of Ukraine.

A default could have negative effects on military power as well. Defense represents the largest category of federal discretionary spending, and a disruption in the government’s ability to pay bills would harm readiness and investment. Pentagon leaders have begun warning about their potential inability to pay troops on time, and the uncertainty could delay the production of key weapons systems. The House has already postponed its consideration of this year’s defense authorization bill while debt ceiling negotiations proceed.

The near-term diplomatic costs are starting to pile up as well. President Biden, tied down in debt negotiations in Washington, cancelled his scheduled visit to Papua New Guinea and his attendance at the Quad meeting in Australia. A decade ago, President Obama missed the APEC leader’s meeting and the East Asian Summit in order to deal with a government shutdown at home; allies fretted at America’s absence while Beijing crowed. Today the stakes are higher, and allies already worry about American presence and leadership.

That points to perhaps the gravest national security consequence of a debt default. In the contest with China, Washington asks allies to cast their economic and security lots with the United States. For those would-be partners, the choice amounts to a bet on the future of American power and competence.

Washington has, however, provided ample fodder for hesitation in recent years: political polarization, the January 6 Capitol attacks and Washington’s crisis-prone decision-making invites questions about America’s ability to generate national solutions. The messy end to wars in Afghanistan and Iraq suggest strategic incompetence and a reluctance to match national security means to our stated ends. The enduring trend toward protectionism and America First-style economic policy is spawning questions among allies about where exactly their interests fit in U.S. decision-making.

Such doubts are naturally catnip to China, America’s chief competitor. Beijing portrays the West as in terminal decline, led by an increasingly divided United States unable to deliver the world — or even its own people — the unity and effectiveness they desire. America continues to coast, Chinese leaders suggest, on the privileges it accrued during a unipolar moment, including dollar dominance, the ability to impose sanctions, disproportionate influence in international institutions, and untrammeled military power. This dynamic, they say, is an artifact of yesterday’s world, and no longer reflective of a rising China and dysfunctional America. It reflects, instead, the antiquated disarray of Western democracies, in contrast to efficient and effective autocracy. A debt default would provide enormous ammunition to those pushing the narrative of American decline.

Given the massive downsides, an actual default is very unlikely. Both Speaker of the House Kevin McCarthy and President Biden insist that defaulting on the nation’s debt is “not an option.” But unlikely is not impossible. In 2011, the Budget Control Act established a penalty — massive, indiscriminate spending cuts — designed to be so severe that Republicans and Democrats would have no choice but to agree on a deal that would avoid them. A nice concept, but one that failed utterly: “sequestration” spending caps harmed America’s defense for years. Today’s game of chicken is far more dangerous. The recognition of a default’s costs is no guarantee that we will avoid one.

If American leaders are even remotely serious when they point to long-term competition from revisionist China, when they proclaim this the decisive decade to shape global order, and when they insist that the United States, working in concert with its allies, must augment its power in order to prevail in a generational contest of systems — if they are serious about any of that — they cannot possibly entertain a default on the debt.

Yet the deadline looms.

Richard Fontaine is the chief executive officer of the Center for a New American Security.