Monday, 21 October 2013

Erosion of confidence: US avoided a debt default, debt ceiling shifted to next year

It happened again last week – at the last minute the United States avoided debt default. But the world is losing patience with this latest episode of dysfunctional leadership.




THE world waited with bated breath as the deadline neared. And breathed a sigh of relief when at the last minute, the United States avoided crossing its “debt ceiling” and a default on its debts.

The debt ceiling was raised, and the government shutdown also ended last Thursday after weeks of a high-profile standoff between US President Barrack Obama and the Republicans in Congress.

But this relief was mixed with incredulity and frustration.

First, the respite is only temporary; the can is just kicked down the road.

The deadlines for government shutdown and debt ceiling are shifted some weeks away to January and February next year.

Second, this fiasco has happened several times already.

Each time the Congress gave the President a reprieve of just a few more months, before the new deadline loomed again.

The Republicans are adamant to cut the government’s spending and its budget deficit and won’t allow the government to function unless they get what they want.

Previously, Obama compromised and gave in significantly.This time, he stood firm and refused to negotiate.

The Republicans went too far, choosing to defund and damage his landmark medical insurance reform as a condition for lifting the debt ceiling.

Obama decided “enough is enough” and relied on public opinion to win his gamble. The Republican Party blinked, as the public heaped the blame on them.

The party leaders in Congress had to eat humble pie and agree to stop the shutdown and lift the debt ceiling without defunding or changing the “Obamacare” health reform.

But thirdly, while the President finally showed the Republicans who was boss, the damage had already been done to the United States’ image as a superpower and the champion of American-style democracy.

The US system of governance has become dysfunctional, with one side of the political divide willing and able to paralyse the government functions led by the other side, using the weapon of withholding approval of the government’s budget and capacity to borrow.

Just days before the deadline, the world’s finance ministers meeting at the annual IMF-World Bank meeting in Washington highlighted the extreme dangers of a US debt default.

Around the world, leaders and analysts mourned the end of the past certainties surrounding the United States and its dollar as the world’s financial leader.

A widely-quoted article in China’s Xinhua news agency was titled: “Washington’s political chaos proves it’s time for a de-Americanised world.”

The commentator, Liu Chang, said the latest crisis reveals that the United States is unfit to govern itself, let alone lord it over the rest of us.

“It is perhaps a good time for the befuddled world to start considering building a de-Americanised world.”

After castigating the United States for meddling in the political affairs of countries in its efforts in building a world empire, the writer attacks a self-serving Washington for shifting financial risks overseas, while the debt ceiling crisis “has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonised”.

“Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated, and a new world order should be put in place, according to which all nations, big or small, poor or rich, can have their key interests respected and protected on an equal footing.

“Part of that reform is the introduction of a new international reserve currency that is to be created to replace the dominant US dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.”

As the Xinhua opinion piece indicated, many countries are concerned about the US dollar being the world’s dominant currency. It is by far the most important reserve currency.

Countries holding US dollar treasury bills have been worried about the once unthinkable, that the US would be unable to honour its debt service obligations, thus putting their hard-earned assets in jeopardy.

On the other hand, countries that took loans denominated in US dollars could face punishing terms of repayment if the interest rate on the US dollar shoots up upon fears of a US debt default.

Companies, traders and governments that use the US dollar as the medium of exchange would also suffer from chaos in the markets for money, commodities and trade, if there is a massive loss of confidence in the US and its dollar.

Thus, continuing uncertainty arising from feuds in Washington will accelerate the erosion of confidence in the US as world economic leader.

The Financial Times columinist Martin Wolf commented that the US debt ceiling is the legislative equivalent of a nuclear bomb, and that the law needs to be repealed since there cannot be orderly government under so destructive a threat.

But another editorial comment in The Independent states that while there is a straightforward case to ditch the debt ceiling law, the same extremists who use it as a weapon of mass destruction will be loath to part with it.

In the past few days, some Democrat and Republican leaders in charge of budget policy in Congress have started meeting, giving hope they plan to avoid a repeat of the fiasco when the budget and debt ceiling deadlines re-appear in a few months.

But given the polarisation and ideological divides in Washington, chances are that the world will be treated to another round of the battle and the chaos. If that happens, there will be more calls for a new world order.

Contributed by Global Trends by Martin Khor
> The views expressed are entirely the writer’s own.

Related posts:
1. A de-Americanized world needed !  
2. Winds of change blowing in Asia 

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