The US government shutdown and 'soft default' on American debt

Editor's note: Lin G. is a CGTN economic commentator. The views expressed in this article are the author's own and do not necessarily reflect those of CGTN.

The spectacle of another US government shutdown has once again gripped Washington, but the implications stretch far beyond the inconvenience of shuttered federal offices or delayed paychecks. Beneath the surface lies a more dangerous signal: at a time when the US national debt has already reached staggering levels, the government cannot even ensure its own day-to-day functioning without temporary stopgaps.

This is where the notion of a "soft default" becomes relevant. While the US has not missed an interest payment or formally declared a default, the recurring spectacle of federal government shutdowns represents a subtler breach of faith with both domestic taxpayers and international creditors.

Erosion of institutional backing

Investors do not buy US Treasury securities merely for the coupons they yield or the legal guarantee of redemption. They purchase them because treasuries are supposed to embody safety, stability, and predictability. These qualities make the dollar the cornerstone of global reserves, and US debt the ultimate safe asset.

A government shutdown calls these assumptions into question. It does not mean that the Treasury will suddenly stop wiring interest payments, but it signals that the political system is no longer capable of ensuring basic fiscal management.

Put differently, US debt has not experienced a technical default, but its institutional backing has been weakened. If any other sovereign faced a similar fiscal paralysis, markets would readily cast doubt on the sustainability of its debt. 

For the US, the privilege of issuing the world's reserve currency masks the short-term consequences, but it cannot fully conceal the gradual depletion of trust.

How is it different this time?

It is true that US government shutdowns are not unprecedented. The US Congress has repeatedly failed to pass budgets on time, producing periods when federal agencies ceased operations. In earlier decades, however, markets shrugged these episodes off. The underlying assumption was that the US economy was strong enough, its fiscal position resilient enough, and its institutions trusted enough that the disruptions were temporary noise.

Today, that assumption no longer holds. Several structural changes make the current environment far more dangerous:

1. Exploding debt and deficits 

US federal debt has surpassed $37 trillion or approximately 124 percent of GDP, with interest costs alone consuming a growing share of the fiscal budget. In such a context, even minor disruptions magnify concerns about long-term sustainability.

2. Constrained monetary policy 

Amid tariffs and inflation, the Federal Reserve has constrained space to ease monetary policy. While lowering interest rates could help alleviate some of the pressure on fiscal and debt servicing, the Fed's ability to do so is constrained.

3. Eroding social trust 

Unlike in past decades, the American public is increasingly polarized, and political battles over budgets are not perceived as temporary disputes but as reflections of deeper dysfunction. While shutdowns may remain episodic, the divisions that produce them are chronic.

These differences matter because they redefine the meaning of a shutdown. It is a symptom of systemic weakness in an era where resilience is in short supply. The cost of uncertainty has grown, and with it, the risk premium attached to America's fiscal credibility.

From economics to legitimacy

At the heart of the problem is the way US fiscal governance has become hostage to partisan competition. Instead of providing a steady anchor for national and international stability, the US budget process now routinely manufactures uncertainty.

The damage of shutdowns cannot be measured solely in delayed services or foregone GDP points. For American citizens, a shutdown signals that their government is capable of abandoning its most basic responsibilities. For global observers, it undermines the narrative that US democracy represents institutional reliability. The supposed superiority of the "American model" now looks hollow when the government repeatedly fails to fund itself.

This is where economics bleeds into politics. A "soft default" is not just about balance sheets but about institutional credibility. Once trust is corroded, no amount of legal guarantees can restore the same aura of dependability. If this process continues, what is at stake is not simply the cost of US borrowing but the sustainability of the American political-economic system itself.

Until the world begins to doubt

The US has endured government shutdowns before and will likely face them again. But the context has changed. In an era of record debt and intensifying social division, each shutdown takes on a larger meaning than the last.

That is the essence of a "soft default." It does not arrive with a missed interest payment or a legal declaration of insolvency. It creeps in quietly, through repeated failures of governance, until the world begins to doubt what was once taken for granted.