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 

US shutdown shows the system is cracking up

The shutdown of the US government by the right-wing Tea Party faction of the right-wing Republican party is a critical moment, one that reveals deepening cracks inside the capitalist state’s political system.

On the first day, 800,000 federal employees were affected by the absence of a government that could pay their wages. On the same day, many of the 32 million Americans not covered by insurance queued to sign up for access to affordable health care.

The new insurance marketplace websites which opened for business on the first day of trading are a key part of the president’s so-called “Obamacare” legislation. Overwhelmed by the demand, many websites crashed in the first hours. 

The Patient Protection and Affordable Care Act was adopted in 2010, in fulfilment of Obama’s election pledge, and Republicans have failed 50 times to block it. To their disappointment, the Supreme Court ruled that that legislation was constitutional.

In trying to place more rocks in the road of a long, tortuous, contradictory journey towards the universal provision of healthcare, Republicans led by the Tea Party have initiated the shutdown of government by denying approval to the federal budget.

So with services closing, government workers are being sent home on unpaid leave. It’s wish-fulfilment time, a dream come true for the super-rich corporate funders of the Tea Party who vehemently hate all forms of public spending.

Never mind that the massive expansion of the insurance market was a Republican model pragmatically adopted by Obama as a way to provide health care for the tens of millions who’ve been denied it in the world’s richest country.

The health industry, especially in the US, has been a feeding frenzy for Big Pharma, for the makers of ever more technologically advanced and expensive medical devices and highly profitable insurance companies.

Although US spending per head on health is 150% more than in the UK, life expectancy at birth is among the lowest of developed countries, while infant mortality is the highest. Potential years of life lost by people under the age of 70 are also far higher. It’s a health system that benefits the well off.

When the economy crashed in 2008, the turning point arrived. The status quo was unsustainable. Millions were thrown out of work, losing access to healthcare funded through insurance as part of their employment contract. Economically, socially and politically the game was up.

One thing is clear: having taken the first tentative steps towards universal access,  the current system of government looks unlikely to survive. Its problems are piling up fast. The two wings of the Congress of the 1%, for the 1%, by the 1% are in deadlock. 

Although the Republicans are trying to block Obamacare, the bigger issue looming ahead is the soaring federal government deficit. Unless Congress votes to raise the debt ceiling later this month, the US government could be staring at an international default as it won’t have the money to service interest payments.

The consequences of default by the world’s biggest capitalist economy are beyond imagination. Most analysts are saying it couldn’t happen, they’ll surely come to their senses. But the Republican Party is so divided in itself that anything is possible.

Who is to blame for all of this? Reflecting a generalised rejection of the political process, a Reuters/Ipsos poll showed about one-quarter of Americans would blame Republicans for a shutdown, 14% would hold Obama responsible and 5% Democrats in Congress, while a massive 44% said everyone would be to blame.

George Atkinson, an 82-year-old Coast Guard veteran of the Korean War was among those pushing past barricades to visit the National World War ll Memorial,  closed by the government shutdown. "The whole group ought to be replaced, top man down," he said.

Events around the world show that it’s not so much the people who are operating the system who are to blame. It’s the system itself. It’s in trouble wherever you look. The Greek government has arrested some of its own, elected, Golden Dawn representatives. Britain has a non-elected coalition. Berlusconi is singlehandedly trying to bring down the Italian government. The system is cracking up.

Gerry Gold

Economics editor

It's the system, stupid

A sketchy deal on spending cuts which allow the US debt ceiling to be raised is no more than an acknowledgement that law-makers in even the world’s largest national economy can make little if any impact on the deepening crisis.

The credit ratings agencies whose pronouncements are treated as holy gospel say that the America’s AAA rating won’t last. And it’s easy to see why. US debt, already at a staggering $13 trillion, is forecast to rise without pause through to 2016.

As it does so, the cost of financing the debt will have to come out of current budgets, leading to further cuts in health and welfare benefits. Political turmoil in Washington, with Barack Obama looking increasingly like a lame duck, one-term president, only adds to the sense of crisis.

Stock markets nose-dived on news of the vague compromise which, like the UK Coalition’s savage austerity programme, is founded on false expectations of growth. Market speculators immediately turned their attention back to Europe, driving up borrowing rates once again for Italy, where Berlusconi has called an emergency meeting, and Spain, where prime minister Zapatero yesterday postponed his holiday to deal with the crisis.

Throughout the post-war period, the world economy grew as it had to if profits were to be maintained, but the global trend in the rate of that growth has been relentlessly downward. Throughout the period of globalisation a series of ever sharper, deeper and more extensive crises saw the rate plummet and then recover, but the recovery was always weaker than the crash.

During 2007/8, when a series of individual mortgage defaults undermined the extreme fragility of the global house of cards built from credit and debt, the growth rate threatened to turn negative for the first time. This prompted the panic which saw governments and central banks flood the world with more credit, which as debt has now rebounded with such devastating effect.

Sovereign debt quickly overtook private and corporate debt, and now all are in the same boat – with the rudder entangled in a net of credit default swaps, holed below the water line and sinking fast towards a collective default. The long-hoped for “return to growth” is just that – a hope.

Reports on manufacturing this week reveal that output is not just slowing badly in the US the world’s largest producer, but actually shrinking in China, the world’s second largest, and in the UK – the seventh largest.

The universal consequences of the crisis and attempts to fix it include inflation boosted by fantasy finance and unemployment as public bodies cut spending. Corporations respond in their usual ruthless way in a desperate bid to maintain profits.

Foxconn, the world's largest maker of computer components which assembles products for Apple, Sony and Nokia, is in the spotlight after a string of suicides of workers at its massive Chinese plants, blamed on harsh working conditions. The Taiwan-based company currently employs 1.2 million people, with

most of them working on the Chinese mainland.

The corporation’s classic response is contained in its plans to introduce a million robots to its production lines over the next three years to cut rising labour costs and improve efficiency. If it is successful, the products it turns out will be highly competitive, but will flood onto a declining market as the global economy slows further. And because labour is the source of all value, the rate of profit on the whole operation will shrink dramatically.

It’s just another example of the inescapable, contradictory logic that ensures that in the midst of a crisis – and this is unarguably the worst in the short history of capitalist society - any attempt to fix things has exactly the opposite effect. In the 1992 US presidential election campaign, Bill Clinton taunted his opponent with the phrase “it’s the economy, stupid”. Actually, it’s the system, stupid.

Gerry Gold

Economics editor

Time runs out for Obama and the constitution

The irresistible march of economic and financial events undermines legal and constitutional structures, weakens bureaucratic constraints, exposes weak and divided political leadership and transforms long-established relations between people and states.

Generations have stood before the Stars and Stripes and sworn allegiance to the Constitution of the United States. Adopted in 1787, and subjected to 27 amendments – the latest in 1992 – it is the oldest written constitution still in use by any nation in the world.

This is according to Wikipedia, which was itself set up as part of a global movement to undermine the property rights which are of the essence of the capitalist system. They argue rightly that private property in knowledge and software impedes human progress.

But world-shattering events are now shaking the foundations of the United States. The 14th was particularly important in establishing the legal authority of the Federal government in Washington during the reconstruction in the wake of the civil war and the ending of slavery.

Section 4 of the amendment reads: “The validity of the public debt of the United States, authorised by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

Some have suggested that President Obama could invoke this section to raise the government’s $14.3 trillion debt ceiling which is fast being approached. The Republicans are playing hard-ball and declining to reach an agreement with the White House to raise the ceiling before next Tuesday’s deadline. Raising the ceiling is required so that the United States can go on borrowing on international markets and service its debts.

Such a move by Obama would be a constitutional declaration of war with echoes of Abraham Lincoln’s military campaign to bring the south into line. Whether he’s up for this is debatable. But while Obama ponders his next move, what, according to the constitution, “shall not be questioned” is in reality being challenged by the money markets, as well as the obdurate Republicans.

The credit rating agencies which were effectively given power over companies and states by the Basel 2 international agreement on banking laws and regulation first published only in 2004, are threatening to downgrade US debt. That would force up borrowing costs and add billions to the total debt. The “validity” of the US public debt is definitely being questioned.

In any case, would invoking the constitution to raise the ceiling unilaterally do the trick. Not at all, as US commentator Andrew Leonard points out:

“Would taking action under the 14th Amendment make the debt ceiling crisis go away? Highly dubious. Not only would the House GOP [Republicans] immediately start impeachment proceedings, but, as several commentators have observed, there's a real question as to whether investors would continue to buy US Treasuries while the legalities of the president's action were settled. Pretend you are China – do you think it's a wise move to keep buying US government debt while the US goes through a constitutional crisis? Using the 14th Amendment to protect the ability of the US to pay its debts becomes a lot less attractive if as a consequence, borrowing costs for the U.S. government rise sharply.”

Not least among the many problems facing the multitude of politicians, bankers, and civil servants with the hopeless task of holding back the catastrophe is that downgrading a country’s debt to “default”, whether that country is Greece, the United States, Spain or Britain, has dramatic consequences.

During the madness of the last couple of decades, the entire global economy became irretrievably entangled in a seething interdependent mass of credit and debt held together by those fiendish financial instruments known as credit default swaps. The trouble is that if, or rather when one country is declared to be in default, it will trigger a chain reaction throughout the millions of CDS contracts.

No power exists to stop it. And it doesn’t much matter which country is first up. There are no “fixes”, quick or otherwise, as Obama is about to find out.

Gerry Gold

Economics editor

System overload brings meltdown closer

Screaming headlines and scary language convey the immediacy of a renewed economic collapse as financial markets demand political solutions to a runaway debt crisis on both sides of the Atlantic.

According to the International Monetary Fund there is now "serious risk" of eurozone contagion with "large" potential knock-on effects worldwide. "Market participants remain unconvinced that a sustainable solution is at hand."

An emergency meeting of European presidents and prime ministers has been called for tomorrow to try and head off the break-up of the eurozone single currency.

According to the Daily Telegraph’s Ambrose Evans-Pritchard: “Only Germany can save EMU as contagion turns systemic.” He says “Europe's leaders have finally run out of time…. they risk a full-fledged run on South Europe's bond markets and a disorderly collapse of monetary union.”

But Germany’s banks are already heavily exposed to Greek debt and helping Greece would only serve to accelerate the spread of the contagious crisis throughout Europe. Now Portugal’s new government has discovered a gaping hole in the country’s finances, just as Papandreou’s PASOK administration did when it came to power.

Leading business commentator Jeremy Warner does not mince his words: “Financial confidence is again fast evaporating, threatening to plunge the world back into deep recession and some of the hardest times since the 1930s. This might sound unduly apocalyptic, but not since the depths of the banking crisis have conditions looked as perilous as they are today.”

While the failure to resolve Greece’s debt crisis would detonate a global explosion, the much bigger Spanish and Italian economies are under attack by market speculators.

Spain’s cost of borrowing has followed Italy’s soaring rates to unsustainable levels as investors demand higher and higher rates to cover the mounting risk of default. But compare their single digit rates to the punishing greater than 20% now demanded from Portugal and Greece.

Using the terminology of war, global bond trader Pimco says a plan of "overwhelming force to let the markets know that once and for all you’re putting out the fire" in Europe, should start with letting Greece, Portugal and Ireland default.

Attempts to break the US impasse grow ever more desperate as the August 2 deadline for raising its self-imposed $14 trillion debt ceiling approaches. The Financial Times warns that the “US faces economic suicide if spending isn’t restrained”.

President Obama has embraced the latest plan from the bipartisan “Gang of Six” which would sacrifice health and welfare and lead to a dramatic increase in unemployment. Yet there is doubt whether the political will exists for the Republicans to sign up to the deal.

So what of the UK? With the worst ratio of combined public and private sector debt to national income of the world’s developed economies, it is the most vulnerable to a renewed global recession, which would turn to depression immediately.

Says Warner: “The deleveraging [debt write-off] pressures are at their most acute in the[UK] banking sector, where bad debts and higher capital requirements are driving a sustained contraction in available credit. To meet these higher capital requirements, banks must either increase the cost of credit, so as to attract the necessary equity, or significantly reduce the size of their balance sheet.”

As the panic begins, the solutions being promoted become more extreme every day. No manufacturer can avoid the inevitable consequences of a sharp reduction in production. Whilst previously confident global corporations proclaim their prospects for growth to retain shareholders’ loyalty, in the shadows they are taking every opportunity to “restructure”.

Millions of people across the globe are determined that they can’t and won’t bear the costs of the systemic implosion engulfing the capitalist system. The revolutionary wave that began in Tunisia and Egypt is gathering pace as people become ever more impatient with the pace of change.

In town and city squares new democratic forms are in formation that can replace the discredited political systems. The creative genius of the people must now turn to seizing the resources of the system of for-profit corporations that are the source of the crisis and replacing it with a global society producing for need.

Gerry Gold

Economics editor