Tag Archives: Congress

Economic, Financial Markets, Government, Politics, Society, United States

A US default would trigger financial-armageddon…

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.

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Economic, Government, Politics, United States

America’s shutdown and the wider malaise…

AMERICA’S CRISIS

At the beginning of this week, the federal government of the United States of America closed its doors for business.

At the heart of the dispute is the refusal by Congressional Republicans to fund the activities of the U.S. Government so long as they include the provision of ‘Obamacare’, the President’s important signature health reform policy. The White House insists that a group of Tea Party radicals is holding the nation hostage with polls suggesting that the majority of voters share that sentiment. Until the two sides are ready and able to agree a budget resolution, all but essential federal employees will go unpaid. A shutdown of this nature will inevitably have an impact on America’s economy, with some estimates suggesting that as much as 1 per cent from the country’s GDP could be knocked off if a prolonged stand-off ensues.

Yet, what is more worrying is the true significance of the crisis in that it is symptomatic of how America has become – ungovernable. With congressional districts heavily gerrymandered, coupled with a wider, decades-long process of social polarisation, has produced an electoral system that packs Congress with partisan politicians who have no incentive to reach accommodation with the other side. What is more, even if the current impasse can be resolved, there is a much darker cloud on the horizon: later this month America hits the ceiling on its debt limits, with agreement in Congress needed to avoid the pitfalls of the fiscal cliff.

This could provoke an economic as well as a constitutional crisis. In a worst-case scenario, the nation would be forced to default on its borrowing, plunging the global financial system back into chaos – and one which would easily eclipse that seen following the 2008 financial crisis. Many will say that seems inconceivable for politicians on Capitol Hill to allow such a disaster to unfold, but given the obduracy on display, nothing should be ruled out.

The Republican leadership remains in thrall to its Tea Party caucus, but that shouldn’t necessarily deflect from the fact that the hardliners do actually have a point. Like so many other nations around the world, this stand-off in America stems from the promises Washington made to its people that it cannot afford. The argument in favour of lifting the debt ceiling (limit) is that Congress has already written the cheques, and should be required to honour them. Indicative of the problem, though, is that the state wants to spend more without raising taxes.

America’s position, then, is more than just administrative paralysis: it reflects a much wider malaise. Undoubtedly, the U.S. is going through an identity crisis, and remains unsure whether it is to embrace a European social model of higher taxes and a bigger state, as well as what role it should be playing in policing the world.

We can only hope that the current shutdown will prompt a serious attempt for compromise between the parties that will put America’s finances on a more sustainable footing. However, given the dysfunction and lack of coordinated direction in Washington, we should at least prepare for the worst.

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Britain, France, Government, Politics, Syria, United States

Syria: America’s change of political tack…

BARACK OBAMA’S DECISION TO CONSULT CONGRESS ON SYRIA

The parliamentary defeat for the Government in the House of Commons – last week – over Syria, has led many to comment over the long shadow of Iraq, of poor party management by the whip’s office, and, in some quarters, of the perfidious anti-war sentiments of those MPs who rebelled against the Government’s motion. But, with the majority of the British public opposed to military action, the result that so humiliated the prime minister was simply transparent politics and democracy at work: a far cry from that which materialised when Britain joined the U.S. in toppling Saddam Hussein from power in the Iraq war.

As events in Washington over the last few days make plain, the consequences of the British veto are only just beginning to be felt. Over the past week the US had been preparing for retributive air strikes, but the equivocation of the American President was evident enough. It had been left to Secretary of State John Kerry to fulminate against the ‘moral obscenity’ of chemical weapons, while Mr Obama talked in measured terms of a ‘limited and tailored operation’ and a ‘shot across the bow’. London’s embarrassing climb-down for the prime minister could have been met with White House declarations that the US would not be deterred. But whether that bravado would have proved sustainable has now been countered by a President who insists the decision must be ratified by Congress first, even though the President had already made up his mind to take military action.

In the immediate term, America’s change of political tack is significant enough. Mr Obama has been keen to stress that the proposed action (‘limited in duration and scope’ but still enough to ‘hold the Assad regime accountable’) is not time dependant. The president talks now of a ‘surprise’ punitive strike, an answer perhaps that the operational advantages of an early strike has already been lost.

The political and legal climate will not get any easier as time moves on. Russia’s pro-Assad stance, and Moscow’s insistence of a veto-able UN resolution, along with the G20 gathering in St Petersburg this week, is surely testament to the difficulties that lie immediately ahead.

President Obama is far from assured on the support he needs. For one, Congress is not due to reconvene until the 9th of September – with the President having a week to persuade reluctant US lawmakers to support intervention. And, with the American public as equally ‘war weary’ as they are in Britain, and the dynamics of Capitol Hill unfavourable, Barack Obama may find himself in a similar humbling situation to David Cameron.

Regardless of the outcome, the President’s decision to consult Congress has far-reaching implications. As Commander-in-Chief, the President’s powers to commit the US to war will be open to interpretation. Seeking explicit legitimacy from legislators speaks volumes about his concern at the legal basis for action in Syria. A sense of isolation imploded upon by an ambivalent public and a crucial ally lost, means the constitutional balance of the US has changed with Mr Obama choosing to put the matter to a vote. Future presidents may be forced to follow his example as precedent becomes set.

The repercussions go further still. The pro-interventionist French President is also now facing demands to hold a parliamentary vote on Syria. The effects of the British decision in the House of Commons last week are spreading fast and wide.

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