I gave three reasons why mature democracies had become immune to default: they had deep domestic capital markets (allowing them to sell bonds denominated in their own currency to foreigners); they had political systems that facilitate smooth transitions from one government to another; and they had an abiding nationwide commitment to macroeconomic stability.

The first two reasons remain valid. But two elements of the essential commitment to macroeconomic stability have been lost since the global financial crisis in 2007–08: monetary discipline and fiscal discipline. Monetary discipline assures households and businesses that their savings and investments will not be wiped out by inflation. Fiscal discipline avoids a debt build-up that will become burdensome to future generations. The mature democracies in Europe, the United States and Japan have largely succeeded in suppressing inflation, but they have allowed their public sector debt to balloon to unsustainable levels.

Clearly, they knew better. When the European Union started down the path toward monetary union in 1992, the member countries committed to keeping their annual budget deficits below 3 per cent of GDP and their stock of public sector debt below 60 per cent of GDP. If the mature democracies had respected these limits, they would not be in the fiscal pickle they are today.

There is no simple explanation for why the mature democracies went off the fiscal rails. In some countries ageing populations could be the main cause. In others, extreme polarisation of political opinion seems to have eroded the necessary social consensus. Perhaps the War on Terror threw the whole global economy off kilter. Or maybe the core problem was an international monetary system that allowed emerging-market countries to maintain undervalued currencies. This undervaluation, combined with sharply lower barriers to international trade and investment, may have led to shrinking employment in the manufacturing sectors of the mature democracies, which could not be offset fast enough by new jobs in the service sectors.

Regardless of the causes, it looks as though it will take years — if not a generation — for the mature democracies to achieve and sustain the budget surpluses required to bring public sector debt back to comfortable levels.

Still, this dismal outlook might not be the worst consequence of the debt crises in the US and Europe. A greater concern could be that the world is just a small step away from not having a ‘risk-free’ financial asset, leaving global markets adrift like a sailboat that has lost its keel.

Arguably, the health of the international financial system depends on the quality of its single most important product, the US Treasury bond. While understanding that all financial assets have some risk, for decades market participants have viewed US Treasury bonds as being ‘risk-free’ because no other financial asset appeared less likely to experience a default. All other bonds are issued in primary markets and traded in secondary markets at a premium (the ‘spread’) to US Treasury bonds. This reflects the market’s perception of their greater risk of default.

If markets instead believe that the risk of default on US bonds will rise and fall with the political and economic winds of the day — as it does with corporate bonds or emerging market bonds — then the impact will debilitate households and businesses around the world. In particular, both domestic and international investment will be depressed. As a result, trade will languish and fewer jobs will be created. The loss of global GDP could be in hundreds of billions of dollars every year until fiscal discipline is restored in the mature economies.

Can rising powers like China and India provide an alternative risk-free asset? The short answer is no. They may score well on their commitment to macroeconomic stability, but it is likely to take more than one generation for them to have deep capital markets and smooth political successions comparable to what the mature democracies have today.

It is impossible to put a value on preserving the role of US Treasury bonds as the world’s benchmark risk-free asset — or their close rival, Euro bonds. If the political leaders in the United States and Europe cannot do a better job of restoring confidence in their sovereign debt, then our children and grandchildren will suffer the consequences.

Lex Rieffel is a Non-resident Senior Fellow in Global Economy and Development at the Brookings Institution.

This piece was first published here by the Brookings Institution.