Two days or so from now the US government will reportedly run out of extraordinary measures to pay debts and be in default. Some Republicans have even argued this is acceptable as incoming revenues from taxes are enough to pay the interest on US debt for the foreseeable future provided Social Security recipients and others are shortchanged. But the truth is the US government has already defaulted on promises it has made to its own employees and the damage to America’s reputation or credit from even flirting with a default are severe. The rest of the world has taken notice of the incredible political instability in Washington and faithfully begun planning to create a new world financial order that does not grant the US such privileges.

…rarely before has international dissatisfaction with the dollar’s role as reserve currency to the world been as great as it is now. The most visible anger comes from China, with more than $3 trillion of dollar foreign exchange reserves, $1.3 trillion of them held in US Treasuries. For ordinary Chinese, it has come as a revelation to discover they own so much American debt. That they own it in a country which because of political brinkmanship may actually default has provoked understandable fury. “It is perhaps a good time for the befuddled world to start considering building a de-Americanised world“, China’s official government news agency has said….

Serious alternatives to the dollar, such as a global reserve currency, are still a long way off, but the latest shenanigans on Capitol Hill have given the search for them renewed and added momentum. The US is recklessly throwing away its future.

The only thing stopping the switch is a lack of an alternative. But if necessity is the mother of invention then the Tea Party has made getting out from under American dollar supremacy a necessity. If the US government can not be counted on to fulfill its obligations it will damage – if not destroy – the current global financial system.

If Treasury payments can’t be trusted entirely, then not only do all risk instruments need to be repriced, but so does the most basic counterparty risk of all. The US government, in one form or another, is a counterparty to every single financial player in the world.

Its payments have to be certain, or else the whole house of cards risks collapsing — starting with the multi-trillion-dollar interest-rate derivatives market, and moving rapidly from there.

Every financial risk manager across the globe has to be watching the revolting display in Washington right now with horror. If this can not be worked out apocalypse now, but even if there is some last minute deal – no one wants to bet their family and country’s future on the US Congress getting its act together. You can practically hear the ulcers growing in every financial capital in the world – what happens next time the Tea Party takes the debt ceiling hostage? What if they can’t be talked off the ledge?

The US has already defaulted on its reputation for rational and dependable public finance regardless of what happens this week. Let’s just hope there can be a somewhat smooth and orderly transition away form the US dollar that leaves the average American with some purchasing power. But I wouldn’t risk betting on it.