Bimbo Cabidog on Sun 7 Aug 2011 - 23:00 (Published at Free Forum: Country Road
The United States averted a catastrophic default on its huge financial obligations. But it wasn't lucky enough to avoid a credit downgrade. Following a political gridlock in Washington that pushed the world's largest economy to the brink of a debt crisis, Standard and Poor lowered its sovereign rating from AAA to AA+.
Among three major credit ratings agencies, S & P is the most prestigious. Its downgrade was a setback to the US. This posed to trigger a chain reaction of recessionary trends all over the globe.
What brought America to this point?
The capitalist superpower hit its statutory debt ceiling of $14.3 trillion on May 16. The Treasury Department has been taking extraordinary measures to prevent default. But it ran out of options starting August, and there wasn't enough money anymore to pay the nation's bills.
The Treasury faced an August 3-31 cash deficit of about $134 billion, according to the Washington DC-based Bipartisan Policy Center. Expenses for the month ran up to $306.7 billion. The government borrows roughly 40 cents for every dollar.
The US government incurs a huge budget deficit year on year, spending more than it raises money in tax. A credit limit is set by Congress. This time the debt ceiling has to be lifted by August 2 or the American treasury would no longer have funds to meet payments like social security benefits, military pensions, contractor payments and interests.
Slashing government cashflow alone by 40 to 45 percent could already cause serious economic disruptions. With not enough funds, the country would not be able to run itself.
The nation has had public debts since inception. This escalated in recent years to fund big expenses like wars and stimulus packages. Every president since Harry Truman has added to the total.
The debt ceiling has been raised 74 times since 1962: 18 times under Ronald Reagan, eight times under Bill Clinton, and seven times under George W. Bush. But obstinate Republican opposition made the raising of the debt ceiling under President Barrack Obama a highly contentious issue.
The GOP's right wing Tea Party threw a monkey wrench on any effort to arrive at bipartisan legislation that would manage the budget deficit and continue to pay obligations through cuts in spending over the next 10 years as well as additional taxes.
Legislation to resolve the budgetary deficit and debt issues got caught in a tug-of-war between the hard-core capitalist diehards in the GOP who resisted higher taxes on the rich, and elements softening towards the socialist tendency to propose big revenues on wealth and higher social-welfare spending
Sober and responsible heads finally prevailed. The US House of Representatives narrowly passed a deal to let the government borrow $2.2 trillion for payment of obligations. The debt bill cleared the US Senate by 74 to 26 votes.
But partisan recklessness and the dangerous stalemate of several weeks that drew unto the last minute made a downgrade of the country's prized AAA credit rating inevitable.
The bill's passage failed to bouy the financial markets. Wall Street stocks ended down by more than two percent. Japan's Nikkei index followed suit with the same degree. The fact that the US has been almost there spooked.
"Whatever the logic about the tactics, it's very dangerous environment," World Bank President Robert Zoellick said expressing dismay. He added: "To be blunt, to have a debt default in the United States would not only be a financial calamity but should be an embarassment for every American."
China, which is America's largest foreign creditor and trading partner, scored Washington for irresponsibly putting the world on the edge. China has repeatedly urged the US to protect its dollar investments. The state-run news agency said the economic stakes of the US on the world had been compromised by "dangerously irresponsible" partisan agendas.
Citigroup's chief economist Willem Buifer described a US default as "an act of collective insanity."
Buifer said that even if a default was promptly averted, "it would severely dent the credibility of the US as a global financial player and the provider of the world's leading reserve currency."
"There would be an immediate repricing of the dollar and an increase in medium and long-term nominal and real interest rates. Asset, credit and funding markets in the US and the world as whole would likely suffer and a global recession would likely result, centered in the US but not restricted to it," he further said.
Andrew Garthwaite from Credit Suisse said a default would have been disastrous, causing a five percent contraction in the US economy and 30 percdent drop on Wall Street with massive consequences for the world.
Well, America was almost there. Sailing to calmer straits by the passage of the debt bill nonetheless left quite a considerable dent. The S & P backlash is seen to lead to loss of business confidence, market panic, a potential recession in the US and probably the same effect in the world.
The loss of topnotch credit status means the government will be paying investors higher interest rate on borrowings. The US share market would be vulnerable to an exodus of nervous investors opting for safer locations to place their money. What may be brewing during the interim lull is something to watch for with great discernment.
Some words of US President Obama bear pondering. "There are a lot of crises in the world that we can't always predict or avoid - hurricanes, earthquakes, tornados, terrorist attacks. This isn't one of those crises. The power to solve this is in our hands," the world's most powerful human said of the near debt default.
Is a recession - or worse, depression, attended by a financial and industrial debacle of massive scale something that the aging capitalist superpower - the United States, has the means to deflect? Or is it the inevitable fate of the political-economic system that has ruled mankind for a very long time?
The recent crisis in the US that threatens to unleash an economic tsunami all over the globe comes only a little more than a couple of years after the subprime mortgage crunch here toppled giant financial institutions and sent market tremors cascading across Europe and Asia.
Are the two depressing phenomena coming after a very short interval not signs presaging the end times for capitalism?
The deadlock in Capitol Hill over the debt fiasco hides the bigger picture of the deadlock in the globalized economic order. It is a picture of the grip of transnational financial oligarchies running into contradiction with the designs of the free-market economy. It is also a picture of the monopoly of wealth by a few depriving ultimate markets for industry.
Is President Obama exactly correct in saying "the power to solve is in our hands?" The new strain of the problem threatening the same scenario of global recession - the US debt crisis, comes on the heels of a preceding crisis in 2008 that posed to send the global community into the dark ages.
The solution picked at that time was the massive bailout of banks and investment houses to the tune of more than a trillion dollars. Nearly three years down the road, the cure would breed another more deadly disease: the danger of bankruptcy of the American government with no more money in the coffers to pay debts and public expenditures.
It was a $14-trillion question that saw the world's largest economy tottering on the precipice of a collapse.
Among three major credit ratings agencies, S & P is the most prestigious. Its downgrade was a setback to the US. This posed to trigger a chain reaction of recessionary trends all over the globe.
What brought America to this point?
The capitalist superpower hit its statutory debt ceiling of $14.3 trillion on May 16. The Treasury Department has been taking extraordinary measures to prevent default. But it ran out of options starting August, and there wasn't enough money anymore to pay the nation's bills.
The Treasury faced an August 3-31 cash deficit of about $134 billion, according to the Washington DC-based Bipartisan Policy Center. Expenses for the month ran up to $306.7 billion. The government borrows roughly 40 cents for every dollar.
The US government incurs a huge budget deficit year on year, spending more than it raises money in tax. A credit limit is set by Congress. This time the debt ceiling has to be lifted by August 2 or the American treasury would no longer have funds to meet payments like social security benefits, military pensions, contractor payments and interests.
Slashing government cashflow alone by 40 to 45 percent could already cause serious economic disruptions. With not enough funds, the country would not be able to run itself.
The nation has had public debts since inception. This escalated in recent years to fund big expenses like wars and stimulus packages. Every president since Harry Truman has added to the total.
The debt ceiling has been raised 74 times since 1962: 18 times under Ronald Reagan, eight times under Bill Clinton, and seven times under George W. Bush. But obstinate Republican opposition made the raising of the debt ceiling under President Barrack Obama a highly contentious issue.
The GOP's right wing Tea Party threw a monkey wrench on any effort to arrive at bipartisan legislation that would manage the budget deficit and continue to pay obligations through cuts in spending over the next 10 years as well as additional taxes.
Legislation to resolve the budgetary deficit and debt issues got caught in a tug-of-war between the hard-core capitalist diehards in the GOP who resisted higher taxes on the rich, and elements softening towards the socialist tendency to propose big revenues on wealth and higher social-welfare spending
Sober and responsible heads finally prevailed. The US House of Representatives narrowly passed a deal to let the government borrow $2.2 trillion for payment of obligations. The debt bill cleared the US Senate by 74 to 26 votes.
But partisan recklessness and the dangerous stalemate of several weeks that drew unto the last minute made a downgrade of the country's prized AAA credit rating inevitable.
The bill's passage failed to bouy the financial markets. Wall Street stocks ended down by more than two percent. Japan's Nikkei index followed suit with the same degree. The fact that the US has been almost there spooked.
"Whatever the logic about the tactics, it's very dangerous environment," World Bank President Robert Zoellick said expressing dismay. He added: "To be blunt, to have a debt default in the United States would not only be a financial calamity but should be an embarassment for every American."
China, which is America's largest foreign creditor and trading partner, scored Washington for irresponsibly putting the world on the edge. China has repeatedly urged the US to protect its dollar investments. The state-run news agency said the economic stakes of the US on the world had been compromised by "dangerously irresponsible" partisan agendas.
Citigroup's chief economist Willem Buifer described a US default as "an act of collective insanity."
Buifer said that even if a default was promptly averted, "it would severely dent the credibility of the US as a global financial player and the provider of the world's leading reserve currency."
"There would be an immediate repricing of the dollar and an increase in medium and long-term nominal and real interest rates. Asset, credit and funding markets in the US and the world as whole would likely suffer and a global recession would likely result, centered in the US but not restricted to it," he further said.
Andrew Garthwaite from Credit Suisse said a default would have been disastrous, causing a five percent contraction in the US economy and 30 percdent drop on Wall Street with massive consequences for the world.
Well, America was almost there. Sailing to calmer straits by the passage of the debt bill nonetheless left quite a considerable dent. The S & P backlash is seen to lead to loss of business confidence, market panic, a potential recession in the US and probably the same effect in the world.
The loss of topnotch credit status means the government will be paying investors higher interest rate on borrowings. The US share market would be vulnerable to an exodus of nervous investors opting for safer locations to place their money. What may be brewing during the interim lull is something to watch for with great discernment.
Some words of US President Obama bear pondering. "There are a lot of crises in the world that we can't always predict or avoid - hurricanes, earthquakes, tornados, terrorist attacks. This isn't one of those crises. The power to solve this is in our hands," the world's most powerful human said of the near debt default.
Is a recession - or worse, depression, attended by a financial and industrial debacle of massive scale something that the aging capitalist superpower - the United States, has the means to deflect? Or is it the inevitable fate of the political-economic system that has ruled mankind for a very long time?
The recent crisis in the US that threatens to unleash an economic tsunami all over the globe comes only a little more than a couple of years after the subprime mortgage crunch here toppled giant financial institutions and sent market tremors cascading across Europe and Asia.
Are the two depressing phenomena coming after a very short interval not signs presaging the end times for capitalism?
The deadlock in Capitol Hill over the debt fiasco hides the bigger picture of the deadlock in the globalized economic order. It is a picture of the grip of transnational financial oligarchies running into contradiction with the designs of the free-market economy. It is also a picture of the monopoly of wealth by a few depriving ultimate markets for industry.
Is President Obama exactly correct in saying "the power to solve is in our hands?" The new strain of the problem threatening the same scenario of global recession - the US debt crisis, comes on the heels of a preceding crisis in 2008 that posed to send the global community into the dark ages.
The solution picked at that time was the massive bailout of banks and investment houses to the tune of more than a trillion dollars. Nearly three years down the road, the cure would breed another more deadly disease: the danger of bankruptcy of the American government with no more money in the coffers to pay debts and public expenditures.
It was a $14-trillion question that saw the world's largest economy tottering on the precipice of a collapse.
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