Debt ceiling farce holds the world hostage
- The global financial system should not be put at risk by irresponsible squabbling in US domestic politics. If the US political system cannot responsibly handle the hegemony of its currency, global economies cannot be blamed for seeking alternatives to untangle themselves
The game of chicken in Washington is getting close to crashing. Just when people thought Democrats and Republicans were reaching a deal over the debt ceiling, the talks have stalled.
It has become a ritual for Republicans to use congressional approval for raising the debt levels as a lever to force a Democrat president to impose unrelated spending cuts. A quirk in United States law allows Congress to grandstand and hijack the fiscal process for political theatre. But the stand-off is not cost-free. The damage has already been done.
This Republican tactic, seen by many as either cynical or absurd, has shaken a long-standing faith in treasury debts and bonds issued by the US government, which supposedly would never default. Everywhere, investors must recalibrate expectations about what was, until recently, considered the safest type of investments in the world.
As a phrase, “debt ceiling” is a dangerous misnomer. That is probably why Republicans and deficit hawks like to use it. In reality, the US government is not asking to raise new borrowings, but for Congress to approve debt-raising that it has already authorised.
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By artificially creating a periodic “debt ceiling crisis”, the whole world is held hostage.
At the moment, many countries are promoting de-dollarisation because of the way Washington has weaponised its monetary dominance of the global finance system as an instrument of foreign policy. The loss of investor confidence from the debt ceiling fiasco is another self-inflicted wound.
The global financial system should not be held hostage by irresponsible squabbling in US domestic politics.
The “rebalancing” of the world’s two largest economies has been ongoing for more than a decade. China has had to reduce its reliance on exports. In that sense, the threat of decoupling even imposes greater discipline on the Chinese.
Meanwhile, the US is supposed to stop relying on debt-fuelled growth. Over the past 10 years, China has steadily increased its domestic consumption and bolstered imports to reduce its trade gap. The US has yet to deliver for its part.
If the US political system cannot responsibly handle the hegemony of its currency, global economies cannot be blamed for seeking alternatives to untangle themselves from this periodic farce.
