Wednesday, October 16, 2013

Clock is ticking on US debt time bomb

Is America too big to fail? Or will a dysfunctional Congress, by continuing to block a deal on raising the astronomical federal debt ceiling, precipitate a default by the world’s largest economy?

There’s an air of panic. “No clear plan to avoid default as deal collapses”, screams the headline in the Washington Post this morning, with just 48 hours to go before the deadline.

With many government services shut down for nearly three weeks already, it’s small beer compared to what happens if the debt time bomb explodes. In any case, it is already too late to stop the economy unwinding.

There have been several attempts at predicting the sequence of events likely to unfold if Congress cannot come up with a deal, but nobody really knows what might happen. Payments to US war veterans would be amongst the first casualties and they are already on the streets, mounting protests.



For five years, the real conditions in the global economy have been building to a moment that demands something expressive of much greater destructive impact than the “collapse of the house of cards” metaphor widely used for the 2007/8 financial meltdown.

The problem is this: the US needs more debt – an estimated $1.1 trillion to keep paying the interest on the accumulated $16.7 trillion. As with all addictions there has to be a dealer, someone to supply the next fix. Just printing money doesn’t do it.

An increase in debt, and the associated repayments, demands an increase in the value which has to be produced by someone doing productive work, somewhere in the world. And with the US economy not generating enough growth to pay off the debt, exploitation of workers in other countries must also be ramped up.

If you follow the trail of connections to the source of the new value needed to back the debt repayments you find yourself chasing from the factories in China to the murderous conditions in Bangladesh and on to the latest source of cheap labour -Vietnam

Which brings us back to the origins of the crisis. During the 1960s and early 1970s the United States was engaged in a losing war in Vietnam. The impossibly high cost of the war contributed to runaway double digit inflation and mounting federal debt. This in turn forced the US to sever the relationship between the dollar and gold which had been the keystone of post second world war economic arrangements The end of the gold standard opened up the period of credit-fuelled expansion, which itself crashed in 2007-8 when the world system came to a griding halt and many banks went belly up.

Nearly 40 years after the end of the Vietnam war finds the US government still making payments to the veterans who fought there. Based on a causal link to the Monsanto-produced defoliant Agent Orange used in Vietnam, federal officials approved diabetes a decade ago as an ailment that qualifies for cash compensation and it’s a large bill. 

Without the ability to borrow more money, the US government cannot pay out to veterans or anyone else. On October 23, a $12bn social security payment is due, and November 1, a range of bills will use up the government’s remaining cash. As some wit put it, by the end of Thursday the US will be like a shopper who has hit his overdraft limit: he cannot borrow more but still has a little cash in his wallet.

The credit rating agencies are moving to further downgrade America’s AAA grade while Citi and other banks have divested themselves of US debt due for payment over the next few weeks. But for China, Japan, the oil exporters – the main holders of US debt – there’s no such luxury. Selling would drive down the dollar further and leave them well out of pocket.

The House of Representatives is hostage to the far right Tea Party faction and seems determined to go to the brink. President Obama could ignore Congress and raise the debt ceiling himself, but that would provoke a major constitutional crisis.

Whichever way you look at, American capitalism is being blown apart by its addiction to debt. And the rest of the global economy is not too far behind. 

Gerry Gold
Economics editor 

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