US debt ceiling debate as seen by China

Posted | 02/10/2013 / Views | 1681
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Squabbling US politicians raise the ceiling for hubris

Government shutdown just part of the problem facing a country where money politics rules

How long can the US behave as dysfunctionally as it is without the US dollar collapsing or interest rates rising sharply as overseas investors such as China and Japan reconsider their positions in holding US government paper. Is it the beginning of the end of the United States as the superpower or even a global power?

The biggest proof of the arrogance of the US is that few Americans are asking the questions about the implications of a shutdown of the government on the American position in the world. The US is on skid row without understanding its plight.

The land of the free, the greatest democracy, the mightiest capitalist nation in the history of the world, the most powerful superpower the world has ever seen - all the wonderful things Americans like to say about themselves - is being run by children squabbling over who is really in power. Can anyone take such a country seriously?

As far as the foreign holders of US debt are concerned, you can be cynical and say that they are locked in.

To paraphrase Keynes, if you owe your bank $100 you are in trouble; but if you owe the bank $1 million, your bank is in trouble - only in this case we are talking about several trillions of US dollars in US government paper held by China and Japan.

They have invested in US dollars as the safest and best asset available. If they pull out, they risk taking major losses. But there comes a time when a prudent investor has to bite the bullet.

Even if times were normal, prudent foreign investors should be considering other options and cutting back on purchases of US government debt.

But these are not normal times. What is happening in Washington, with political deadlock and the failure to pass the budget causing a shutdown of government, is merely the first part of a political and economic drama in several acts.

Shutdown of the government has occurred before, the last time for 21 days when Bill Clinton was president in December 1996. Commentator Matt Yglesias describes the shutdown as "problematic but decidedly non-catastrophic".

However, there is another, bigger crisis looming, with the US about to hit the US$16.699 trillion debt ceiling, which limits total government debts. On October 17, says Treasury Secretary Jack Lew, the government will run out of money to pay its creditors.

In fact, the debt ceiling was hit back on May 19, but the Treasury resorted to extraordinary measures to stretch out the money and keep paying its bills.

Republicans who have a majority in the House of Representatives say they will not lift the ceiling unless Obamacare, alias the Affordable Care Act, is delayed, the same restriction they attached to the budget, thus causing the shutdown. Obamacare came into effect at midnight on Monday, just as the government began shutting down.

If the debt ceiling is not raised - and it has been raised 85 times before - economists and lawyers say the least bad option would be for President Barack Obama to declare that the ceiling should be ignored. This would probably be unconstitutional and illegal, but better than the US defaulting on its debts, which would send the world into a tailspin.

It is hard for a foreigner to understand what is going on. Obamacare, the Republican excuse for holding the government to ransom, is not some socialist monster, but a moderate healthcare regime using private sector insurance plans.

The failure of government is only part of a wider, bigger malfunctioning of America. It also includes the dominance of the too-big-to-fail banks, which have got bigger than they were when the system almost collapsed in 2008, and the pernicious and growing power of money politics, the rise of the 1 per cent at the expense of the 99 per cent, and the rise and rise of the 0.01 per cent.

Despite the crisis in Washington, stock markets boosted by easy money from the US Federal Reserve reached records last week, surely proof of the hubris before the collapse.


This article appeared in the South China Morning Post print edition as Squabbling US politicians raise the ceiling for hubris