Wednesday, April 16, 2014
Expect swerve before US crashes into debt ceiling
Global Times | July 28, 2011 21:19
By John Gong
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To default or not to default, that is the question. Lawmakers in Washington are supposed to work out America's next budget bill, but instead that is the question they will have to decide. In the next four days, the world is watching if Capitol Hill is taking arms against a sea of troubles along party lines or really haggling and dealing to reach a consensus.

About 30 Tea Party ideologues hold the country hostage, as the budget showdown reaches the culmination of months of efforts by its members and fellow conservatives to demand a smaller government in exchange for raising the federal borrowing limit, usually a standard annual measure.

On May 16, the Treasury instituted what Treasury Secretary Geithner called "extraordinary measures" to provide $232 billion as the US reached its debt limit. Now the deadline is August 2, only four days away, when the Treasury will really exhaust its borrowing authority and the US government would officially default.

Think of it as maxing out the credit card limit, only that you can change that limit on your own while lawmakers in Washington don't know how to.

If no agreement is reached about raising the debt limit, payments of interests and principals on federal bonds would be missed, and social security checks would not be mailed out. The value of the US dollar would dive into a tailspin.

Already both Dow Jones and the Nasdaq have seen major drops over the last few days, as skittish investors pulled back from stocks as the impasse over lifting the nation's debt limit wore on.

The debt ceiling crisis would have worldwide repercussions, likely to generate the second wave of financial tsunami from the US. For China, its huge $3 trillion in foreign currency reserves would take a major haircut.

Will that scenario really happen? Although Wall Street analysts expressed doubt that time would really run out on August 2, leading to a possible default, the White House position is that the Treasury's estimate of the deadline was not a charade,  and that the doomsday scenario will really happen if no agreement is reached by then.

My advice is: hold your breath and expect some kind of make-shift deal reached right before August 2. The reasoning can be found in a long lasting American tradition, where lawsuits are frequently resolved on the courthouse steps, if not late on the eve of trial.

For many lawyers, last-minute settlements are standard operating procedure.  It's a practice that often carries over into Washington's politics.

Before the trial date, there are many bluffs and maneuvers on the part of the two opposing parties. But when the day comes, they both realize that the stake is too high and a showdown in court would be in neither party's interests.

Politicians are certainly more adroit at bluffs and maneuvers. And Capitol Hill has many steps. Both Democrats and Republicans, excluding the manic ideologues among theTea Party caucus, understand the grave consequences of a default.

Among others, the recently proposed legalistic perspective of the budget crisis is likely to provide ammunition to US creditors for a major lawsuit against the US government based on the 14th amendment to the US Constitution, which provides, "The validity of the public debt of the United States … shall not be questioned."

But regardless of the time pressure, the danger is that a hastily reached deal cranked out by exhausted Congressional executives in four days involving trillions of dollars in budget cuts over a decade would be a bad deal without a clear vision. This was as pointed out by Thomas Friedman in yesterday's New York Times.

The two-party American political system has many merits as a functioning democracy. But on this budget issue, it reveals on the downside of deadlocked partisan politics.

The author is a faculty member of the Beijing-based University of International Business and Economics. johngong@gmail.com.


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