Washington's immature debt row harms influence abroad

The messy US debt ceiling debate signals an age of uncertainty, about the US economy and US decision-making alike.

So what did you learn from this week's Capitol Hill cliffhanger if you're a Chinese or European economic planner, a Russian leader inclined to reassert Moscow's hegemony over former Soviet territories, an Iranian leader weighing the calculations of how far to push in the nuclear stand-off, a Pakistani general weighing your country's options, or a Palestinian politician hoping for deliverance from decades of Israeli occupation?

You learnt, essentially, that the post-Cold War era of American global dominance is at an end, and Washington's place needs revising.

Dramatic as it may have seemed, the showdown over the debt ceiling was simply a footnote to a far deeper crisis. America's economy - the world's largest and printer of its reserve currency - is sputtering, unable to generate the demand necessary to fuel a sustainable recovery. And the policies adopted by the US government will accelerate rather than reverse that economic decline.

That's because President Barack Obama has capitulated to a conservative Republican agenda that prioritises reducing the budget deficit by slashing government spending without raising taxes (or, more correctly, without reversing the $3 trillion (Dh11 trillion) in tax breaks for the rich implemented by President George W Bush even as he plunged America into a trillion-dollar war).

"Deficits don't matter," the former vice president Dick Cheney told Mr Bush, claiming that tax cuts and deregulation would spur economic growth, which would in turn generate sufficient new tax revenue to reverse the deficit. Republican leaders continue to hawk the absurd proposition that taxes are responsible for joblessness: this orthodoxy prevails despite the steady rise in unemployment after Mr Bush put hundreds of billions of tax dollars back in the pockets of the richest Americans.

Cutting government spending means laying off teachers, policemen, firemen and a host of other government employees and cancelling procurement contracts that would lead to similar cutbacks in the private sector - every dollar saved in this way is also a dollar removed from the economy.

Official figures show 14 million Americans currently unemployed, and a further 8 million working only part-time because that's the only employment available. Those numbers are more likely to rise than to fall as the government slashes its spending at the worst possible moment, casting hundreds of thousands more into joblessness thereby further depressing domestic demand and creating a downward cycle. Investments necessary to American education and infrastructure necessary to restore its competitiveness will be cut, as well as programmes that soften the burden of decline on the most vulnerable Americans, again further depressing demand.

Mr Obama, who approaches conflict with the instincts of a mediator rather than as a fighter, has allowed himself to be bullied into addressing the economy on the terms of his most implacable foes in the Tea Party. Perhaps he hopes that this will burnish his credentials with centrist voters, but it could also demoralise much of his party's voter base.

And if anything, the morbid theatrics of the debt-ceiling debate will have confirmed a sense that Washington's decision-making has been utterly infantilised by a national discourse shaped in no small part by the comic demagoguery of Rupert Murdoch's Fox News Channel.

If you're an economic decision-maker in Beijing, Washington's plight will be giving you nightmares: the deficit and attendant risk of a downgrade in the investment rating of US debt - and in the value of the dollar - poses a massive risk to China's sovereign wealth, more than $1 trillion of which is held in US Treasury bonds. But the long-term decline of demand in the US economy threatens a key export market on which China's manufacturing sector depends.

Nor is such anxiety confined to China; Europe, too, will have been disabused of any expectation that the US economy can lead a global recovery when its government is adopting policies that will dampen domestic demand.

And to think that the US once lectured others on the management of their economies; if the potential consequences hadn't been so dangerous many of the world's economic decision-makers would have been sniggering at last week's spectacle in Washington.

While nobody's going to take any precipitous steps that risk their existing dollar-denominated assets, the likes of China can be expected to intensify their efforts to find alternatives to parking their savings in US Treasury bonds.

The US economic weakening has, inevitably, been accompanied by geopolitical retrenchment of which Libya - on which Mr Obama spoke of "leading from behind" - may be the model. Given the domestic economic crisis, Washington is in a poor position to launch any major new military adventures, even more so when those (as in the case of any action against Iran) risk a sustained spike in oil prices that could further depress the US economy.

America's ability to influence events in Iraq and Afghanistan has waned, and the Arab Spring showed neither established regimes nor the protesters challenging them paying much heed to Washington. Mr Obama's aversion to conflict could spur others to follow the Republican playbook. It's hard to imagine Israel's Prime Minister Benjamin Netanyahu, for example, heeding any new pressure from Washington, as unlikely as such pressure might be.

The international economic order established with the US at its core after Second World War, and expanded after the collapse of the Soviet Union, is running out of steam, and the global balance of power is shifting, its components fracturing. The debt-ceiling debate in Washington highlighted an age of austerity dawning in the US, which will translate globally into an age of uncertainty.


Tony Karon is an analyst based in New York. Follow him on Twitter @tonykaron

Published: August 3, 2011 04:00 AM


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