David vs. David

U.S. debt crisis: A temporary agreement is better than no agreement at all

Despite the eleventh-hour temporary deal in Congress, many of us who are America’s friends are still shaking our heads at the partial government shutdown and debt ceiling crisis during recent weeks. What has gone wrong with reason and political civility in the capital of a nation known for so long as the world’s good governance beacon on a hill?

The two issues might have sparked a global economic crisis if the American government had reached its current debt ceiling of $16.7 trillion today. If Congress had not raised the ceiling, the Treasury would have had only $30 billion in working capital left to pay its bills, which meant that the country would probably have defaulted on loans for the first time since 1790, when it first borrowed money.

The Economist magazine noted that the Treasury would run out of room to shuffle money around to meet its obligations: “Soon after, the government may or may not be able to delay payments to contractors, pensioners and other claimants, so as to avoid a default on the national debt. (The Treasury’s) computer systems will not allow it to prioritise in this way .... In any case it may be illegal, not to mention unpopular, to pay bondholders in Beijing before pensioners in Pittsburgh.”

Other nations reacted to the crisis in differing ways. The most extreme, China, which wants its currency to replace the greenback as the world reserve currency, carried a commentary from the government-controlled Xinhua news agency calling for China and the rest of the world to start to “de-Americanize.” This came from a government of a country which now owns about $1.3 trillion in U.S. government debt and to which millions of Americans (and others) have seen their manufacturing jobs transferred over the past twenty years. Peter Navarro of the University of California argues convincingly that China has conquered most consumer markets around the world mainly by cheating under World Trade Organization (WTO) and other trade laws.

The far-right Tea Party faction of the Republicans in Congress favoured not raising the debt ceiling at all. Washington should spend no more than it raises in taxes, they insist. According to at least one opinion poll, almost 40% of Americans judged that there would be no serious consequences if Congress had not raised the debt ceiling.

'Quantitative easing,' the American Federal Reserve’s favoured tool for dealing with the current serious economic situation, is probably essential to encourage the creation of millions of jobs. It means, however, printing vast amounts of new greenbacks to pay for long-term U.S. government bonds, backed by nothing more than Americans’ and the world’s willingness to accept them as a currency of continuing stable value.

Following World War I, most residents of Western countries concluded that universal suffrage democracy was the only legitimate form of governance. A little-debated issue at the time was whether popularly-elected governments would be self-disciplined enough to avoid hyper-inflation of the Weimar Republic’s bring-your-shopping-money-in-wheel-barrows variety, which ruined millions of Germans financially and helped to elect Adolf Hitler as chancellor in 1933. German democrats since Hitler have recognized the necessity of keeping their fiscal and monetary houses in order.

Canada, for example, did not achieve a single balanced federal budget from 1968 until 1995. Successive U.S administrations also spent much more than they raised in taxes, causing increasing deficits, ballooning debt and large, postponed tax increases for future generations. In fairness, many of the deficits and much of the debt were added during the Cold War and balance of power decades, including the Korean and other wars, during which Americans shouldered much of the human and financial costs for defending human dignity in Europe and across the world.

Kenneth Rogoff, former chief economist at the International Monetary Fund (IMF), has rightly stressed the importance of maintaining the greenback as the world’s main reserve currency. One advantage of this, he notes, is that both the American government and its citizens pay lower interest rates on domestic and international loans resulting in savings of more than $100 billion a year.

Having written much about the consequences of excessive debt for national economies, Rogoff is concerned about “soaring public debt,” but thinks the greater need now on the debt ceiling issue is to maintain the “civil political decision-making” now at risk. I agree, but no-one should think that serious harm has not been done in recent weeks to American financial credibility across the world.

David Kilgour is co-chair of the Canadian Friends of a Democratic Iran and a director of the Washington-based Council for a Community of Democracies (CCD). He is a former MP for both the Conservative and Liberal Parties in the south-east region of Edmonton and has also served as the Secretary of State for Latin America and Africa, Secretary of State for Asia-Pacific and Deputy Speaker of the House.

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