July 29, 2011 12:40:35 am
In the 18th century,they designed for intimacy. The narrow roads of cities designed then struggle to contain the traffic of a larger,more expansive age. So it is,too,with constitutions: procedures laid down for a world when aristocrats with entangled interests got things done with a nudge,a wink and a firm handshake,written for an age before railroads,let alone before cable news,struggle to contain the hundreds of screaming interest groups that define modern politics.
The United States is the home of what Americans like to say is the worlds greatest constitution,but is in fact the worlds most outdated. The stately processes that define Washington DC are relics of an earlier time; and they have driven the US,and the world,towards a crisis over government spending that reveals how fearfully close we are to losing the unquestioned faith in US economic and political power that is crucial to international stability.
Could the debt crisis really precipitate another financial slump? We dont know. And we dont know because this situation is quite unprecedented. US federal government deficits were recklessly expanded over the past decade,through wars,tax cuts and post-crisis spending. In order to keep working,government needs to keep borrowing money; in order for the executive to keep borrowing money,the legislature needs to raise the limit of debt it is allowed to take on. Thats the debt ceiling a staggering $14.29 trillion that the US hit,according to Treasury Secretary Tim Geithner,on May 16. He said then that he would take extraordinary measures to postpone any chances of the government actually running out of enough money to meet its obligations till August 2. Geithners deadline is almost upon us; and yet Congress has not raised the debt limit.
What happens,if Republicans in Congress dont give in over the next couple of days,and the US government is forced to shut down till theres a compromise? First of all,US treasury debt will be downgraded by credit-rating agencies,marked as more risky. This has never happened before,and its consequences are hard to predict. Current ratings for treasury bonds are AAA,and a downgrade would take them to AA+,a level at which many mutual funds are still permitted to hold them. So we may not see a giant,immediate market crash. What we would see,however,is a near-inevitable rise in the cost of borrowing in the US which would further strain its listless economic recovery,and jeopardise the growth paths of several of its trading partners,including India.
More worrying,though thankfully less likely,is an actual default,in which the government runs out of money to meet its obligations. On August 4,treasury debt worth $87 billion comes due the reason that Geithner set an August 2 deadline,because thats the day he would want to sell more bonds for money that would redeem his earlier debt. Rolling over your debt like that stays possible only as long as the markets think youre good for it. The moment you default on anything even on social security or healthcare payments investors will move to euro-denominated debt,or corporate debt. (Indeed,some data over the past few days indicates thats already happening to an extent.) And if people actually stop wanting to hold US government debt,if they view it as too risky,well see a run on the money markets,a systemic shake-up,that could dwarf what happened in 2008. Combined with Europes troubles,that would plunge us all of us right back into recession.
Indias growth projections assume that the US will stay strong,pulling the world economy along with it. Individuals all over the world,in their retirement,investment and even career plans,also make that crucial assumption,whether consciously or not. But 60 Republicans in Congress,those who owe their seats to the self-proclaimed Tea Party movement,are trying their hardest to falsify that assumption. They think theyre holding their own leadership to account; they think a crisis increases the chances that a Tea Partier will take the Republican nomination and then defeat Obama in 2012; and some claim they dont believe a default or a downgrade is likely,or even a big deal. Nothing seems likely to sway them. The dependence of American institutions on the existence of people like those who designed them those who largely share values and are willing to agree has been starkly exposed by the Tea Party. And Obamas relentless search for a centrist compromise,partly an ideological compulsion and partly driven by institutional factors,has wound up empowering extremes already made powerful by two revolutionary decades for communications technology.
This crisis,created out of practically nothing,demonstrates how the myth of American invincibility is being undermined by its own dysfunctional politics. Which would,no doubt,be an amusing spectacle for the rest of the world were it not that this very myth is also the shaky foundation upon which so much of global security rests. And not just international financial stability,but also global policing: the war against Gaddafi in Libya could have been derailed by the Tea Party as well,but,fortunately for the Benghazi-based rebels,the Republican right was split over it. There isnt a corner of our world not North Africa,not the South China Sea,not the northwest of the Indian subcontinent that doesnt rely on Americas near-bottomless military commitment as a near-permanent balancing factor. If that is thrown into question,so are the American promises and credibility that underlie any prospects of medium- and long-term regional and international security.
It is entirely possible that the US will avoid a default,and even that some sort of cobbled-together deal is voted on and passes the US Congress that prevents a government shutdown at the risk of facing another default crisis a few months from now. But at least one ratings agency might downgrade US treasury debt anyway. Whether or not a downgrade catalyses a 2008-like crisis,it will definitely poke giant holes in the myth of American invincibility. Americas economy,its political and institutional strength,its ability to project power,will no longer be the gold standard,beyond debate. It will instead be paper money,open to question and inherently unstable,if faith in its value disappears.
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