Debt debacle dents America's international standing

After months of political posturing and performative outrage, things are not exactly as they were

US President Joe Biden addresses the nation on Friday. AFP
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At the last moment, the apocalyptic storm clouds threatening to rain chaos across the global financial system have lifted.

President Joe Biden on Saturday signed into law the Bipartisan Budget Agreement to raise the debt ceiling and avoid a first-of-its kind default that would, we were told, have tipped the US into a recession to rival the financial crisis of 2008. Such an event would have laid waste to economies across the globe just as they are struggling to recover from the effects of the Covid-19 pandemic.

Crisis averted,” Mr Biden declared on Friday night in his first Oval Office address to the nation, underscoring the gravity of the occasion.

“The stakes could not have been higher if we had failed to reach an agreement on the budget.”

And just like that, the disaster was over. After four months of political posturing and performative outrage, things are exactly as they were.

Except they aren’t.

Come Monday, the US Treasury will have enough cash to pay its bills after Congress authorised an increase of the $31.4 trillion debt ceiling. Politicians will move on to their next fight and the recent trauma will quickly recede in the rear-view mirror.

While we can breathe easier now that America didn’t drive itself over a fiscal cliff, any sigh of relief will not mask the insidious effects of the debt default debacle.

Having been the world’s cultural and financial hegemon since the end of the Second World War, America can be complacent about its global primacy. The US dollar remains the world's top choice for currency reserves held by central banks, and US Treasury bonds are still considered the ultimate safe investment.

This will continue to be the case for now, but something is shifting, and the debt debate has fuelled a growing yearning for alternatives.

Why should another country, through no fault of its own, see the value of its US holdings collapse just because a few extremists in Washington are ready to destroy everything to prove a political point about government spending?

“You’re going to have to do a default,” former president Donald Trump told his Republican colleagues during a debate on CNN last month, unless Democrats stop “spending money like drunken sailors”.

Mr Trump passed three debt ceiling increases without preconditions (granted, much of this was Covid-19 spending) and increased the national debt by about $8 trillion when he was in office, so of course his financial advice should be taken with a shovel of salt.

Mr Trump's debt quote became a political prop in Washington, displayed here by House minority leader Hakeem Jeffries. Bloomberg

But the fact 71 Republican members of congress and 17 Republican senators voted against raising the debt ceiling last week suggests many share same crash-and-burn mentality of the self-proclaimed “King of Debt” who bankrupted six businesses. Several Democrats also voted against the bill to protest its cuts to social programmes and environmental laws.

A default would have tanked the value of the greenback, wiping out the spending power of any nation holding reserves in US dollars.

Lost in the debt default saga was how the rest of the world is shopping around for ways to counter US financial dominance. Already, many developing countries want an alternative to the US dollar as the prime currency. Guess which country would benefit most? China, America’s top rival.

Underscoring the lingering effects of the debt debate, credit agency Fitch last week kept America’s “AAA” credit rating on “Rating Watch Negative”, saying Washington's continued brinkmanship has dented confidence in the government's ability to deal with its fiscal responsibilities.

“In fact, there has been a steady deterioration in governance over the last 15 years, with increased political polarisation and partisanship as witnessed by the contested 2020 election, repeated brinkmanship over the debt limit and failure to tackle fiscal challenges from growing mandatory spending has led to rising fiscal deficits and debt burden,” the agency said in a statement.

Most infuriating, the debate was largely unnecessary. If hardline Republicans are fine raising the debt ceiling when their guy is in the White House, why inflict so much worry when it's a Democrat in power. America does spend too much money and should cut back, but everything should be on the table – including the Pentagon's $842 billion budget – not just social programmes that provide a lifeline to so many.

As the June 5 date when the Treasury would have run out of money drew closer, warnings from pundits and politicians grew ever louder. The stock market was going to lose half its value, wiping out retirement accounts. Social security programmes would disappear. And eight million people in the US would lose their jobs.

We came “this close” to it happening, and the whole drama is probably going to be replayed in two years when the new spending limit is reached.

It is not a good look for America, and the world is noticing.

Published: June 04, 2023, 12:54 AM