About a ‘US default’ and “the fate of dollar”

Brian T. Moynihan, Chairman and Chief Executive Officer of the Bank of    America Corporation
Photo: Reuters

Prepare for a US debt default and a recession that will drag down corporate earnings, according to Bank of America CEO Brian Moynihan. In an interview with CNN, the head of the second-largest US bank said he hoped the government wouldn't slip into default on its debt. But it's a possibility, he warned, one which could rattle markets and the economy.

"We have to be prepared for that, not only in this country but in other countries around the world," Moynihan warned. "You hope it doesn't happen, but hope is not a strategy – so you prepare for it."

That ominous warning comes shortly after the US hit its $31.4 trillion borrowing limit in January, which prompted the US Treasury to implement "extraordinary measures" to prevent the nation from defaulting on its debts. The measures will last until June, leaving Congress with little over four months to either raise the debt ceiling or risk a financial meltdown and epic stock market crash, experts say.

But talks to over the government's budget are making little progress, with Republicans and Democrats sparring over possible spending cuts if the US is to raise the debt ceiling.

Moynihan noted the US has needed to borrow more in recent years due to extraordinary circumstances, like the COVID-19 crisis, but he shot down suggestions made by other commentators that the US government should scrap the debt ceiling completely.

"There's got to be an argument about how we make sure we live within our means as a country?" he said in the interview.

Moynihan added that Bank of America is still expecting a mild recession to hit the economy, as inflation and high interest rates are still a huge concern. Central bankers have raised rates 450 basis-points to lower high prices, but rates that high could drag on corporate earnings and send the economy into a downturn, Bank of America previously warned.

The US dollar’s status as the world’s main reserve currency is in jeopardy, renowned economist Nouriel Roubini, who predicted the global financial crisis of 2008, wrote in an article for the ‘Financial Times’.

While no currency is yet capable of replacing the greenback on the pedestal altogether, the US currency is quickly losing its competitive advantage to the Chinese yuan, Roubini said.

“Given the increased weaponization of the dollar for national security purposes, and the growing geopolitical rivalry,.. some argue that de-dollarization will accelerate… In a world that will be increasingly divided into two geopolitical spheres of influence – namely those surrounding the US and China – it is likely that a bipolar… currency regime will eventually replace the unipolar one,” the economist, dubbed ‘Doctor Doom’ by Wall Street for his tendency toward grim predictions, stated.

“Complete exchange rate flexibility and international capital mobility is not necessary in order for a country to achieve reserve currency status… And while China may have capital controls, the US has its own version that may reduce the appeal of dollar assets among foes and relative friends. These include financial sanctions against its rivals, restrictions to inward investment in many national security-sensitive sectors and firms, and even secondary sanctions against friends who violate the primary ones,” Roubini argued.

The economist also noted that China has been stepping up yuan transactions with its foreign partners, and said this trend will likely continue, with more emerging market economies welcoming “the ability to trade oil in [yuan] and to hold a greater share of their reserves in the Chinese currency… given that they do a great deal more trade with China than the US.”

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