The crisis in the United States over its “debt ceiling” should be more than just an occasion to observe how aspects of that country’s politics have become dysfunctional. After all, it might severely damage an international financial system still recovering from the crash of 2008. US government spending over the past decade, on wars and stabilisation programmes, has meant that its national debt has crept up towards the maximum permissible level, $14.29 trillion. In order to fund its continuing operation, the Democrat-controlled executive will need the legislature to increase this maximum — to raise the debt ceiling. However, the Republican-controlled legislature is not willing to do so unless the government agrees to deep, and controversial, cuts
in spending, including on social security and health.
If the debt ceiling is not raised, one thing will certainly happen, and one thing might well happen. The first is that credit-rating agencies will downgrade US treasury debt, signalling it is less secure. Many holders of treasury debt do so because they are required to hold AAA-class debt, and a change in that rating will create uncertainty and panic in the markets, which will certainly spread worldwide. Yet the second, possible, consequence is even more dire: that the US government is forced to default on some of its payments. A US default is unprecedented, and analysts have been trying to imagine its effects. A recent JP Morgan report suggests that it will cause a run on the money market that will rival what happened in the autumn of 2008. This might well cause another set of bailouts to be needed, stress the international economy and hit US GDP growth by as much as a percentage point — which will unquestionably hinder global recovery.
It is unclear whether all American policymakers see the problem in its entirety. Meetings between the government and naysayers in the Congress might well prove fruitful before the August 2 deadline the US treasury announced months ago, averting the immediate crisis. But, even in this best-case scenario, the cloud of uncertainty that this brinksmanship has created will take a long while to dissipate.
in spending, including on social security and health.
If the debt ceiling is not raised, one thing will certainly happen, and one thing might well happen. The first is that credit-rating agencies will downgrade US treasury debt, signalling it is less secure. Many holders of treasury debt do so because they are required to hold AAA-class debt, and a change in that rating will create uncertainty and panic in the markets, which will certainly spread worldwide. Yet the second, possible, consequence is even more dire: that the US government is forced to default on some of its payments. A US default is unprecedented, and analysts have been trying to imagine its effects. A recent JP Morgan report suggests that it will cause a run on the money market that will rival what happened in the autumn of 2008. This might well cause another set of bailouts to be needed, stress the international economy and hit US GDP growth by as much as a percentage point — which will unquestionably hinder global recovery.
It is unclear whether all American policymakers see the problem in its entirety. Meetings between the government and naysayers in the Congress might well prove fruitful before the August 2 deadline the US treasury announced months ago, averting the immediate crisis. But, even in this best-case scenario, the cloud of uncertainty that this brinksmanship has created will take a long while to dissipate.
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