- Paul Krugman warned a US debt default risks stripping financial markets of a safe, liquid asset like the dollar.
- "The risk from a debt default is *not* that some other currency will take over the key role now played by dollar securities," he said.
A US debt default risks depleting financial markets of a safe, liquid asset like the dollar, according to Paul Krugman.
In a tweet on Sunday, the Nobel economist shared a chart showing how the US government has to borrow money at higher interest rates compared to other countries, including France, Germany and Japan – and how that could pose a risk to financial markets if the US defaults on its debt.
"Kind of amazing how often one sees assertions that the global role of the dollar lets America borrow at low interest rates," Krugman said, seemingly mocking such views.
"The risk from a debt default is *not* that some other currency will take over the key role now played by dollar securities. It is that *no* currency will be available to play that role — that financial markets will be disrupted by the lack of any safe, liquid asset," Krugman added.
US debt default fears are heating up as a June 1 deadline to lift the $31 trillion ceiling draws closer – and that's helped the lift greenback over the past two weeks.
The US dollar is typically seen by investors as a safe-haven asset in times of turmoil, because it retains value rather than plunging.
Talks in Washington about raising the debt limit have hit an impasse, with Republican House Speaker Kevin McCarthy saying discussions with the Biden administration have reached a standstill.
"We've got to get movement by the White House and we don't have any movement yet," McCarthy said at the Capitol, according to the Associated Press. "So, yeah, we've got to pause."
Policymakers like Treasury Secretary Janet Yellen have made grave warnings if the US were to default on its debt, saying it could "break" financial markets and lead to an "economic and financial storm."