Mr. Obama has every reason to hold his ground, and will almost certainly do so with bitter memories of concessions made in the last debt ceiling showdown in 2011 -- a political mistake that he has vowed never to repeat. Washington has seen countless bitter fights over the decades, some resolved at the eleventh hour, some not. Not even the messiest disputes stopped the US becoming the world's paramount power, or stopped the nation drawing together again with extraordinary cohesion and moral force.
Almost everybody thought Watergate would cripple American foreign policy. It did no such thing. Within fifteen years the Soviet Union had bitten the dust, and America was supreme. Much of the press coverage has focused on various short-term dislocations from counterproductive sequestration measures, but the real risk is more profound. Yes, the dollar would remain the world's main reserve currency even after a gratuitous bout of default; there is simply no good alternative yet – certainly not today's euro. But even if the US keeps its reserve-currency franchise, its value could be deeply compromised. The privilege of issuing the global reserve currency confers enormous advantages on the US, lowering not just the interest rates that the US government pays, but reducing all interest rates that Americans pay. Most calculations show that the advantage to the US is in excess of $100bn per year.
There was a time, during the 1800s, when the United Kingdom enjoyed this "exorbitant privilege" (as Valéry Giscard d'Estaing once famously called it when he served as the French president Charles de Gaulle's finance minister). But, as foreign capital markets developed, much of the UK's advantage faded, and it had almost disappeared entirely by the start of the first world war.
The same, of course, will ultimately happen to the dollar, especially as Asian capital markets grow and deepen. Even if the dollar long remains king, it will not always be such a powerful monarch. But an unforced debt default now could dramatically accelerate the process, costing Americans hundreds of billions of dollars in higher interest payments on public and private debt over the coming decades. Ironically, the debt-ceiling fight is not really about debt. The Republicans are hardly debt hawks when they control things. The last Republican presidential candidate, Mitt Romney, and his vice-presidential running mate, Paul Ryan, campaigned in 2012 on a programme that would likely have added trillions of dollars to the US debt over the next 10 years, owing to tax cuts and increased defence spending. Rather, the debt-ceiling debate is about the size and reach of government. Yes, the US should worry about its soaring public debt – and about the rising pension and healthcare costs that are fuelling it. Despite baseless politically motivated claims to the contrary, the academic research still overwhelmingly suggests that very high debt is a drag on long-term growth.
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