Audio Transcript:

Lisa Mullins: I'm Lisa Mullins and this is The World. A Republican Deficit Reduction Plan appears to be headed for a vote in the House of Representatives. If it passes, the bill would go to the Senate, where the Democrats would almost surely defeat it. Failure of the plan in the House could force a bipartisan compromise to end the debt crisis. World markets have been unnerved by the risk of a U.S. default. They're watching anxiously as the Congress tries to bring America back from the brink by Tuesday's deadline. Justin Fox is editorial director of the Harvard Business Review Group. Justin Fox, this is our debt crisis; we own it, sadly, but it has got pretty long arms. How are global markets reacting to all the uncertainty?

Justin Fox: Stock markets, when there is uncertainty and scary things in outlook, tend to go down. The other big thing that has been happening for a while is the currencies out there that are seen as safer â�" like the Australian dollar or the Swiss franc â�" have been going up and up and up for a while.

Mullins: So what's this? How do we parse that out? They're going in all directions.

Fox: Yeah, well people are just taking their money out of risky things and putting them into what they see as less risky. The weird part of that is normally, for the past 50 years when that happens in global markets, that means moving money into U.S. Treasury securities. Right now, that doesn't seem like the smartest thing to do. So I think investors around the world and central banks, everyone else, are really flummoxed as to what exactly they are going to do. Yeah, they can put some money into Australia, but there aren't enough Australian government securities out there to make up for all the money that would shift out of Treasuries.

Mullins: So are foreign investors being driven away, or are they at least unmotivated, yet?

Fox: Yeah, I think if there were an alternative, they'd all be jumping away from the dollar now. There's been this discussion for decades about the dollar's days as the globe's currency are numbered. Right now Congress is basically saying: Please, please! Don't use the dollar anymore. But there's no obvious alternative. A couple of years ago it looked like the Euro might be, but they have their own financial crisis going on.

Mullins: Okay, so we don't know what's going to happen with this debt crisis, but what parts of the world are watching it most carefully and why?

Fox: The Chinese have the biggest pile of Treasury securities sitting in their central bank and banks. So I think they have a huge amount of concern. And that's true to a lesser extent in Japan, Germany, and a lot of other countries. I also think, especially with China, there's this thought of â�" Wow! Someday maybe this is going to have to transition to us. And we're going to have to be the basis of the global monetary system. But they're not stepping up right now because they're not really ready to.

Mullins: This is interesting because we look at the before and after. These places are worried right now. Are they taking any measures â�" any of the countries you've mentioned or others â�" as contingency plans in case we do fall into this crisis, and in case we do default?

Fox: That's what has been kind of a shock. I spent a bunch of time this morning looking at newspapers from around the world, hoping there would be articles about, like, the German contingency plans for if the U.S. defaults. And there clearly must be people in central banks and elsewhere talking about these things, but I don't think anybody knows what the contingency plan would be. They're all still figuring that somehow this problem will go away; that eventually Washington will get its act together. And they are so uncertain about what the consequences would be if Washington doesn't get its act together, that no one really seems to have a path or a plan forward if that doesn't happen.

Mullins: And to follow that through, where does that leave various countries? What are the real effects?

Fox: I so totally wish I had the answer. It's going to totally unsettle the global financial system. I have no idea if the predictions of disaster and markets plummeting around the world are correct. That's a possibility. Another possibility is there will be these few days of disbelief and uncertainty and then things will just go forward with higher interest rates on U.S. Treasuries and other U.S. debt. I have never seen a situation where all the experts, you ask them, and they just don't know.

Mullins: Justin Fox, editorial director of the Harvard Business Review Group. Thank you for coming in.

Fox: Thank you for having me.