Nobel laureate and well-known economist Paul Krugman believes that if the US defaults on its national debt, The financial markets are disrupted by the lack of a safe and liquid asset, a role previously played by the dollar.
What happened: Krugman called A tweet read: “The risk of a default is *not* that another currency will take over the key role now played by dollar-denominated securities. Rather, *no* currency will be available to play that role — financial markets will be disrupted by the lack of safe, liquid assets.”
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The economist’s comments come at a time when President Joe Biden and Republican lawmakers have so far failed to come to a conclusion on the debt ceiling by the so-called X-date in early June — the date when the Ministry of Finance Money is expected to be tight – and it’s getting closer.
Rental Fees: Krugman pointed out that, contrary to popular belief, the dominance of the dollar does not allow the US to borrow cheaply compared to other countries. In fact, the dollar could be the dominant currency in the world. HoweverYields on Treasury Bills – the interest rates at which the government borrows money from the market – are determined by the country’s fundamentals, which include its fiscal policies and current account situation, among others. The Treasury yield also takes into account the prevailing interest rate in the country as a proxy or benchmark.
With the extension of the debt ceiling crisis to the fourth week of May and with the Federal Reserve persistent Raising interest rates to fight inflationGovernment bond yields are trending higher, which increases the cost of the government bond.
Krugman illustrated this fact with a chart comparing benchmark 10-year government bond yields from various countries, including the US, France, Germany and Japan. Japan, with its ultra-loose monetary policy, has the lowest long-term borrowing costs among its peers.
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