The debt ceiling drama playing in Washington might look like the rerun of a bad horror movie. But this is no Hollywood flick. The Republican Party, reeling under the election defeat in November, is holding the US Treasury hostage to its demand for change in policy. The danger that the world’s largest debtor will default has become too real. Unless the US Congress extends the government’s borrowing authority, it will run out mid-February as also its ability to honour its obligations. It is not just that millions of US government employees may have to be sent home and services shut down, it would send chills down the spine of creditor foreign governments and US bond holders. The threat of an unprecedented default by the holder of the world’s reserve currency — dollar — could push the US back into recession and wreak catastrophic consequences worldwide. The world is too closely interconnected to accept such gambles with the economy.
Ever since late 19th century, when undersea telegraphic cables linked continents and connected markets from New York to Hong Kong, development in one place caused swings elsewhere. The arrival of international telephone and, more recently, the Internet, along with opening of markets and liberalisation of capital markets and banking, have intimately intertwined world economies and any noise of scuffles coming from Washington sends tremors through global markets. In August 2011, when the Republicans and Democrats fought the first round over fixing the country’s debt ceiling, Standard & Poor’s downgraded the US from its gold-plated AAA credit rating for the first time in history. The Dow Industrial Average plunged nearly 2,000 points in a month, and it has taken a long year for the market to recover. A repeat of the debt ceiling fight now risks sending the US economy back into a downward spiral, affecting global financial markets and trade.
The so-called debt ceiling crisis is so quaint that it deserves a little explanation. Under the American system, the two houses of the Congress legislate spending and appropriate the fund for the expenditure, also deciding how to raise revenues. Fed up by the onerous task of repeatedly authorising spending as well as borrowing to meet the deficit, the Congress passed the Second Liberty Bond Act of 1917, requiring the government to only seek periodic authorisation for a debt ceiling. Since 1962, the Congress has passed such authorisation 74 times in a routine manner.
After all, having mandated a certain spending and not provided for enough revenue to execute it, the Congress has effectively authorised the government to meet the deficit by borrowing. Redundancy of a debt ceiling legislation has been, until recently, a quaint practice leftover by history. Financing two unfunded wars in Iraq and Afghanistan and paying for the growing cost of social security and medicare, Washington has racked up huge debts. And the Congress has, most of the time, routinely approved increased debt ceiling — 18 times under Ronald Reagan and eight times under Bill Clinton.
If the House of Representatives controlled by the Republican Party fails to authorise a higher ceiling than the current one by mid-February, President Obama will be forced to shut down large parts of the federal government and stop paying soldiers and retirees.
In what amounts to taking the entire US creditworthiness and the world economy hostage, the Republicans have refused to authorise a new debt ceiling unless the White House agrees to major cuts in government spending and restructuring of entitlement programmes. According to reports, nearly half the House Republicans believe that, in this hostage drama, the side showing reckless disregard for the consequences of failure has the upper hand. As Republican Senator Pat Toomey put it, “We Republicans need to be willing to tolerate a temporary partial government shutdown, ... and insist that we get off the road to Greece, because that’s the road we’re on right now.” An outraged Obama has declared that he is not ready to “have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed.” He pledged that “they will not collect a ransom in exchange for not crashing the economy”.
The world is helplessly watching America’s politicians as they play out the fiscal hostage drama, dragging all to the precipice of disaster — it’s the price of a globalised world.
The author is director of publications at the Yale Center for the Study of Globalisation and Editor of YaleGlobal Online
(This story was published in Businessworld Issue Dated 28-01-2013)