What Would U.S. Default Mean for Canada – and the Global Economy?

Will America’s Debt Crisis have Canadian Aftershocks?

Republicans and Democrats probably will reach a deal to pay America’s bills before the U.S. government runs out of cash at the end of July – probably – but [in the meantime it] has pushed the United States — and the world economy — toward a fearsome shock at a time when the world economy cannot afford any more shocks. If [a U.S. default did happen, however…]  what would it mean for Canada? [The answer is surprising. Read on.] Words: 832

So says David Frum (www.frumforum.com)  in edited excerpts from an article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Frum goes on to say:

If the Crisis Last Only a Couple of Days

The surprising answer: if a U.S. default does not last very long — that is, less than a few days — it would likely prove surprisingly bullish for Canada [unlike most other countries]…

First, it’s important to understand what exactly is at risk. If the debt ceiling is not raised in time, the U.S. government will stop paying its bills sometime after July 22. Washington will probably continue to pay interest on its bonds but hospitals that have treated Medicare patients, nursing homes that house Medicaid recipients, military and civilian employees of the U.S. government — these and many others will be refused some or all of the money that is owed to them. That will be a huge shock to the credit-worthiness of the United States. Through most of the 20th century, the U.S. government was the world’s safest risk. That would very suddenly no longer be true, prompting a search for new (and better-governed) safe havens. Canada is one such safe haven.

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Since the debt crisis took serious form last month, the Canadian dollar has gained against the U.S. dollar, more than three cents since mid-June. (And no, it’s not about energy prices. Switzerland is not an energy producer, and the Swiss franc has gained even more against the U.S. dollar.)

While America’s triple-A bond rating has been called into question, Canada’s triple-A rating remains secure — meaning that Canada’s borrowing costs could dip below those of the United States.

If the Crisis Continues for Some Time

However — and it’s an important “however” — if a U.S. default continues for any substantial length of time, nobody will escape the consequences, Canadians least of all.

The U.S. government is the largest purchaser of goods and services on the planet. If it abruptly ceases paying for its purchasers, the shock will cascade through the global economy.

• If the U.S. government does not pay its suppliers, those suppliers won’t be able to pay suppliers of their own — some of them located in Canada [not to mention elsewhere in the world] – which  could trigger supplier defaults on their financial obligations sparking another U.S. and international banking crisis..
• If unpaid U.S. government suppliers lay off workers, those workers must cut back on their own purchases, including purchases from Canada [and elsewhere in the world].
• If the cutback in U.S. government activity slows overall U.S. economic growth (already slowed by the rise in energy prices this year), it’s hard to see how Canada [and the rest of the world] does not feel the pain of the slowdown.
• Canadian exports [75% of which go to the U.S.] to the United States rose 22% in 2010 over the depressed levels of 2009 but a shock in 2011 could stop that progress…

Divided government in the United States is always a rough-and-tumble business. The Republicans who control the House of Representatives want less spending and taxing than does Barack Obama. Arriving at a compromise between the two parties was never going to be easy but the Republican decision to use the threat of default to get their way in negotiations escalated the confrontation in ways rarely before seen in U.S. history. The Republican decision to deploy this terrible threat has pushed the United States — and the world economy — toward a fearsome shock at a time when the world economy cannot afford any more shocks.

Conclusion

The U.S. [debt] drama may seem like somebody else’s problem but it’s Canada’s problem, too; not at first — at first, it will be Canada’s windfall — but soon enough.

*http://www.frumforum.com/will-america%e2%80%99s-debt-crisis-have-canadian-aftershocks

Related Articles:

1. Raising the Roof – On a Higher Debt Ceiling That Is!  https://munknee.com/2011/05/raising-the-roof-on-a-higher-debt-ceiling-that-is/
2. Top Myths on the U.S. Debt-ceiling Crisis   https://munknee.com/2011/05/top-myths-on-the-u-s-debt-ceiling-crisis/
3. America’s Political Process Guarantees Another Financial Crisis!   https://munknee.com/2011/03/america%e2%80%99s-political-process-virtually-guarantees-financial-crisis-2-0/

Editor’s Note:

1. The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
2. Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above