July 22 is D-day in Washington DC. D for
debt, D for deficit and D for default. If the two bitterly
opposed major parties that straddle the vast ideological
divide in the United States political system cannot come to a
compromise and agree to lift the country's artificially
imposed federal debt ceiling, on August 2 the Government will
be unable to pay its bills and debt repayment obligations.
This default would likely plunge global financial markets
into chaos. Ratings agencies would be expected to downgrade
the US' credit ratings, interest rates would increase forcing
the country back into recession, there would be a flight on
the dollar and a second major credit crunch might ensue -
with banks scrambling to call in loans.
Worries about the impasse have already pushed Wall Street
stocks lower, with one US financial analyst describing the
situation thus: "There's a perfect storm happening on a
global macroeconomic basis with no debt deal here and the
ongoing issues in Europe, and the market is looking at all
these things and is fairly anxious."
"Fairly anxious" is a don't-frighten-the-horses
understatement. Most commentators are saying a default would
be catastrophic with knock-on effects across the globe;
others are saying the consequences for the US economy are too
drastic for it to be allowed to happen. But there are few
signs the hardline small-government, anti-taxes Tea Party
elements - that appear to be making the running within the
Republican Party on this issue - are listening.
The Tea Party sees itself as having a mission to bring down
government: it appears it has no place for any objective
analysis of how and why the US is in this economic mess. How
did it come to this?
Democrats would insist the crisis has historical origins,
with George W. Bush having inherited record surpluses and
squandered it on tax cuts and military adventures, and with
the sub-prime mortgage fiasco and global financial crisis
playing their part, too; the Republicans that essentially
"big Government" and unaffordable social spending is to
More prosaically, the debt ceiling - the Congress-sanctioned
total amount of money the US Government can borrow - stands
at $US14.3 trillion, a limit reached in mid-May and
subsequently met by accounting manoeuvres and
higher-than-expected tax revenues.
Typically, when the US Government cannot raise the money it
requires to meet, for instance, soldiers' wages, or federal
pension payments, it sells "debt" in the form of government
bonds. To date, these have been purchased by countries with
cash surpluses such as China, Japan and the United Kingdom.
But now, unless there is an agreement to raise the ceiling,
come August 2 the country will not be able to pay its bills.
For some months the Republicans have used their majority in
the House of Representatives to block such moves unless its
own stringent debt-reduction priorities are met - including
up to $US4 trillion in spending cuts and excluding any form
of tax increases, or the closing of certain tax loopholes.
President Barack Obama has said July 22 is the deadline for a
deal since it would take the ensuing 10 days to formulate and
pass the necessary legislation. Yesterday, there appeared to
be some light: Reuters reported the White House had signalled
Mr Obama could support a short-term increase in the US
borrowing limit - as long as it was part of a broader deficit
reduction deal (he had previously promised to veto any
short-term extension of the $14.3 trillion debt limit).
It was reported Mr Obama's new stance was made possible by a
proposal for long-term deficit reduction from a group of
senators known as the Gang of Six, which had revived hopes in
Washington that a broad agreement on spending cuts could be
The omens for a resolution had not previously looked
especially good. The Federal Reserve has reportedly been
actively preparing for the possibility of default. The
implications of such a state of affairs reach well beyond the
No-one can afford to be complacent about the extraordinary
situation in the United States. An unprecedented default,
when aligned with the various debt crises in the euro zone,
is likely to ratchet up the cost of borrowing worldwide,
including in this country, and threaten New Zealand's own
It must be hoped that common sense and compromise prevails.