Paul Krugman Says No Currency Will Be Able To Take Over Dollar's Role If US Defaults On National Debt: 'Financial Markets Will Be Disrupted...'

Nobel laureate and noted economist Paul Krugman believes if the U.S. defaults on its national debt, financial markets will be disrupted by the lack of a safe and liquid asset, a role played by the dollar so far.

What Happened: Krugman said in a tweet, "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."

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The economist's comments come at a time when President Joe Biden and Republican lawmakers have so-far failed to reach a conclusion regarding the debt ceiling with the so-called X-date in early June — the date when the Treasury Department is expected to run out of cash — getting closer.

Borrowing Costs: Krugman pointed out that, in contrast to popular notion, the dollar's dominance does not allow the U.S. to borrow cheap compared to other countries. Indeed, the dollar may be the most dominant currency in the world. However, yields on treasury bills — the interest rates at which the government borrows money from the market — are determined by the country's fundamentals that include its fiscal policies, current account situation among others. The treasury yield also considers the prevalent interest rate in the country as its proxy or its benchmark.

With the debt ceiling crisis getting extended to the fourth week of May and with the Federal Reserve persistently hiking its policy rates to tackle inflation, yields on treasury bills have been trending on the higher side, increasing the cost of government borrowing.

Krugman highlighted this fact using a chart that compares 10-year benchmark treasury yields of different countries, including the U.S., France, Germany and Japan. Japan, with its ultra-loose monetary policy, has the lowest long-term borrowing costs among these peers.

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