AMERICA ON A PATH OF SELF-DESTRUCTION

For weeks, now, the world has watched anxiously as the richest and most powerful nation on earth has set itself on a definite course of self-destruction. First came the partial shutdown of the government over Congress’s refusal to agree a budget resolution; now, with even more seriousness, America is approaching the point at which it will reach the ceiling for its national debt, and will, presumably, have to default because no money is available for the U.S. to pay its debts.

The seriousness of the situation is such that the global financial system is built around the idea that America’s debt is the safest of all – usually in the form of bonds issued by the U.S. Treasury. It is this underpinning that makes the dollar the world’s main currency reserve, with Japan and China having each bought more than $1 trillion of U.S. bonds. Other nations around the world have also invested heavily, with hundreds of billions tied up in U.S. treasury debt. The thought now that such borrowing might not be secure has sent tremors through financial markets.

The consequences need to be understood. In a worst-case scenario, a U.S. default would trigger a financial-armageddon, and one that would match or eclipse that of the 2008 financial crisis. More likely, though, is a selective default, with individual bonds failing to be recognised (as each rolls-over). Whilst that would not immediately undermine the dollar’s currency reserve status, it would chip away at the faith and confidence the world has placed in America, accelerating the decline that many feel is already under way. Beijing’s repeated calls to ‘de-Americanise’ the world economy is eroding America’s prestige and prosperity, but, that said, there is no alternative reserve currency waiting to take the dollar’s place, as there was when the pound fell from global prominence.

Then there are the economic ramifications. Once the debt limit has been reached, the U.S. would be forced to live within its means. In the long-term that would be a good thing as expenditure could only be pared against tax receipts. The immediate constriction of government spending, however, on such a scale – given the current levels of American borrowing – would prompt an immediate and severe recession. The world economy would be brought to a shuddering halt.

One wonders whether the current antics, particularly that of the Tea Party, is appreciated to such an extent that it is undermining America’s image, power and credibility. The willingness of Tea Party Republicans to renege on fiscal promises that Congress has already made does raise questions far exceeding political gerrymandering.