Last Updated on Tuesday, 30 November 1999 05:00 Tuesday, 02 August 2011 09:50
Political in-fighting in the US - the country that wants the world to emulate its democracy - may finally end to prevent a US default on its debt repayment commitments. But, till the last minute, US politicians showed zero concern either for US image abroad or for the countries that have invested their reserves in US sovereign debt.
In the event America defaults on its debt, these 90 countries could face the risk of weakening of their currencies because their central banks kept investing in US sovereign debt in spite of where the US seemed headed since 1960 - the year after which successive US administrations began hiking the US debt ceiling.
Investing in US debt remained attractive because it continued to be rated AAA although US imperial ambitions wrecked America s industrial supremacy making it the world s biggest importer and net debtor. Now the same rating agencies warn that if the US defaults on its debt, they will lower the rating of its debt securities.
But US politicians didn t bother about the impact of a US default on the countries holding US debt securities as reserves, and on trillions of dollars worth of Repo deals because institutions that lent against the security of US debt paper could ask borrowers for additional security or for repaying part of the debt (margin calls).
First the Republicans moved a bill in the Democrat-controlled Senate whereby the government could borrow $2. 5 trillion if it agreed to cut spending by $5. 8 trillion over the next 10 years, which was defeated. Next, a committee of three Republicans and three Democrats devised a plan for cutting the fiscal deficit by $4 trillion.
Under this plan, three quarters of the savings were to come from spending cuts and the rest from tax hikes. Next the Republicans offered a plan whereby the deficit was to be cut by $3 trillion in exchange for increasing the government s debt ceiling by $1. 5 trillion.
On July 29, the Republican-controlled Congress passed a bill proposing a debt-ceiling hike of $900 billion subject to equal cuts in spending. That bill was promptly defeated by the Democrat-controlled Senate. So was the fate of the next bill that sought spending cuts of $2. 2 trillion in exchange for a $2. 4 trillion hike in the debt ceiling.
Throughout this wrangling, the Republicans resisted any significant increase in government borrowing. On the other hand, the Democrats sought tax hikes to cut the fiscal deficit, while the Republicans kept demanding cuts in development outlay and state funding of health services and social security. This amounted to reckless politicisation of the issue that mandated implementing a sane mix of tax hikes since unduly high taxes could make the American industry more uncompetitive; as it is, it can t compete with Asian manufacturers.
Even if the US avoids a default, from now on, it will be seen as a bad borrower because it has set the worst example of governance in recent times. Reason: after WW-II, wherein until 1942 it sold arms to both the Axis and Allied powers, it acquired over 60% of the global gold stock, and became the world s richest country. Yet, by 1971, after invading Korea in 1952 and replacing the French in the Vietnam war, US gold reserves had depleted to a point where it cancelled the gold-US dollar fixed parity - the heart of the Bretton Woods Agreement - and refused to exchange US debt securities (held by the French government) with gold.
In spite of this default, it kept fighting wars - intervened in the Afghan and Lebanese civil wars and, and since 1980, in the Afghan war against the USSR. Next, it invaded Iraq (once in 1991 and again in 2003), and Afghanistan in 2001 after 9/11 as part of its war-on-terror .
According to President Obama, these wars cost $1 trillion, but war expense estimates prepared by independent analysts suggest that these wars cost $3. 2 trillion, and the future cost of treatment and compensation payments to disabled US soldiers would increase this cost to $4 trillion. US sovereign debt has reached its $14. 3 trillion ceiling imposed by the US parliament. But after August 2, further borrowing alone would ensure paying routine state expenses, and for servicing several hundred billion dollars of US debt due on August 15.
Expert estimates, and the US government s own plea that the US needs $3 trillion to meet its debt repayment commitments until end-2013 because in the interim period it would be impossible to cut the burgeoning fiscal deficit and raise this amount. Cutting expenditure is impossible because fighting wars shifted America s focus away from repairing and expanding the physical infrastructure. Rail and road networks, bridges, tunnels and dams badly need repairs even if (at the cost of America s future) this infrastructure is not expanded.
Besides, rehabilitating over 700,000 soldiers disabled during America s recent wars will cost a lot, and it is unlikely that America could borrow even $1. 5 trillion. Governments everywhere are shying away from investing their reserves in US debt; they are switching to gold. Just look at the rise in the price of gold.
Advent of the euro (to America s dismay), calls by IMF s Dominique Strauss Kahn for a new SDR to replace the US dollar as reserve currency, and Qadhafi s plan to create the Gold Dinar for selling oil clearly indicated that the US dollar had lost its glamour because of America s adventurism.
America s democracy has been a disaster because it elevated to the White House the front men of its armament industry, the corrupt corporate sector, and the likes of Rupert Murdoch in its media. Deregulation set in motion by Ronald Reagan distorted American ethics, innovative abilities, and trading practices.
Intoxicated by power, successive US administrations forgot that Americans had to share this planet with the rest of the humanity, not occupy it. They also forgot that living on borrowed money while America waged self-destructive wars was becoming a way of life that Americans now find hard to shed.
In 2002 Ziauddin Sardar and Merryl Wyn Davies authored a book entitled Why do people hate America that lamented America s loss of the global admiration it acquired during WW-II. Americans did not read this book. The US will pay a price for its conduct but, sadly, it will be paid by the ordinary Americans because state-funded health services and social security benefits may disappear, and America s physical infrastructure may corrode further. Three cheers for American democracy!
Courtesy: Business Recorder
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