The Geopolitics Of The US Debt Ceiling

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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The usual sweltering summer heat of Washington is keeping those in homes with high ceilings cool, and if they care to open their windows, on a lower consumption of power. But those homes are becoming few and far between as the consumers who make up the largest segment of the nation’s economic output are increasingly living on the edge, losing jobs and the attendant incomes, in fear of the descending glass ceilings. America’s government is busy raising its debt ceiling, the self-imposed borrowing limit of the United States government, lest those glass ceilings come down crashing on the nation’s nervous populace.

The White House − at the behest of the President of the United States, Barak Obama, Secretary of the Treasury, Timothy Geithner, Chairman of the Board of Governors of the Federal Reserve System, Benjamin Bernanke, and the bi-partisan leadership in the United States Senate consisting of Senators Mitch McConnell (R-OK) and Harry Reid (D-NV) − wants the debt ceiling to go up before August 2nd, in 3 increments over the next 2 fiscal years, to $17 trillion, the economic implication being that raising the debt ceiling will lead the economy to grow to $17 trillion by 2013 and to politically blame the conservatives in Congress, who are opposing the request by the White House to raise it, if the economy does not do well.

Whatever the domestic politics of the debt ceiling debate in the United States Congress as politicians on both sides of the aisle prepare for the general election of November 2012, the trend of unabated Wall Street bonuses and Main Street layoffs, Bush or Obama, which has been established since the crisis began toward the end of the summer of 2007 when the Wall Street investment bank Bear Stearns collapsed, is continuing.

This madness, given the brain power per square inch in Washington and New York, must have a method or the entire town can be considered to have gone insane, the summer heat notwithstanding.

The initial response to the economic crisis was to raise the debt levels in all of the Group of Seven (G7) nations consisting of the United States and Canada, the United Kingdom, Germany, France and Italy, and Japan, beginning in 2009, after the election of Barack Obama.

With the exception of Germany, the work horse of Europe, the European Union’s (EU) Economic and Monetary Union (EMU) is in the grip of extraordinary pressures to be sundered into pieces even as it struggles to stay together from Greece to Ireland.

Japan is keeping its eyeballs above water, literally and metaphorically, its more than a decade-long deflationary liquidity trap seeping nearly permanently into its national psyche as much as its earthquakes and its experience with nuclear power, both violent and peaceful.

American economic recovery which had begun in late 2010 is suddenly beginning to resemble that of the major emerging markets, Brazil, Russia, China and India (BRIC), intent upon exporting more than importing, benefiting from the cheap dollar and competitive domestic production (or import substitution as it is known in the economics of international trade).

With the economic recovery of the United States threatening to stall because of the fear of stagflation and inflation expectations as in the 1970s due to the looming energy and food shocks because of emerging market growth and similar to those before the onset of the Great Recession beginning in 2007, the debt-ceiling debate is now focused on raising the risks for another imminent economic slowdown, once again globally. Depression, which was feared in 2007, is again rearing its Hydra-head. And perhaps, for a reason.

The government is capping the national debt at about 100 per cent of the nations’s Gross Domestic Product (GDP or the dollar value of all the goods and services produced and consumed within the borders of the United States), if not steadily creeping higher similar to Japan’s for the foreseeable future − a knife edge Harrod-Domar gambit given the emerging currency risks, not only for the United States but for the G7 as a whole because Japan’s debt is hedged by Japan’s large savings in US debt of close to $600 billion, next only to China’s savings in the United States which exceed $1 trillion.

Any rise in US debt will temporarily, for at least up to half-a-decade, send the world economy into a downward spiral should Japan and China decide to dump US Treasuries first and then dollar holdings for all those dollars to eventually return to New York after a further drop in the dollar and for those to be invested within the United States at a lower level of inflation brought about by the coming slowdown, with the Fed indirectly financing US deficits over the next decade through the markets.

This coming economic slowdown will cool and loosely-couple the economies of BRIC from the United States, forcing them to focus on domestic consumption more than being export dependent, raising economic uncertainty considerably in Eurasia, and decouple Japan from the United States to prepare for an American resurgence as an oasis of economic growth under price stability (due to lower food and energy prices) similar to that in the 1990s after the crises from Latin America to Eurasia by about 2022.

This is a very risky negative feedback loop strategy to maintain US economic competitiveness in the face of strong emerging market growth, paying off Wall Street for the European and BRIC declines, and asking Main Street for sacrifice to expand the government and the welfare state rather than working hard as elected representatives ought to, to bring relief to American Main Streets sooner than later.

Instead of playing shadow war games of brinkmanship with international economic policy, it is best that the United States focuses on itself by engaging the Federal Reserve directly, here and now, in transitioning the size of US government to a more responsible, strong and limited form because US consumers may not be able to hold up until 2022 and drop the floor on the economy sending the United States into a tizzy as in 1929 because of the uncertainty at home, outside the White House lawn, rather than abroad.

Else, the summer of 2029 could be a centurion de ja vu of the dust bowl and the “grapes of wrath” with the rest of the world laughing all the way to their banks after stampeding into US domestic markets to take what they can from the carcass of American capitalism.

Farewell Ben Bernanke, the arm chair MIT scholar of the Great Depression, and Tim Geithner, the Rubin-Summers foot soldier of Clintonomics, an ideology that is haunting the country since Monica Lewinsky. The country can do better without you both in high office. Thank you for your service to our country before you could lose even that gratitude.


About Chandrashekar (Chandra) Tamirisa
This entry was posted in Economics, North America and Caribbean, Politics, Transformations LLC, World and tagged , , . Bookmark the permalink.

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