US debt squabbling must not hold the world to ransom
Fitch, the US credit rating agency, on Wednesday warned that it was close to considering a downgrade to America’s triple-A rating as the country’s looming fiscal crisis nears a cliff-edge. It blamed the “increased political partisanship that is hindering reaching a resolution” on raising the debt ceiling.
Over the 20th century, the US debt ceiling was raised about 90 times and, during President Obama’s eight-year presidency, it had to be raised 10 times. This weapon that Congress repeatedly wields is employed to gain some political concessions from the president, most often spending caps or deficit reductions, but it carries the extremely high risk of harming ordinary people and global economic stability. While other countries wish simply to be able to borrow in the first place, America plays with fire each time Congress and the president are forced to haggle over if and how much more the US government can borrow.
The looming threat is always that, if the debt ceiling is not raised in time, the US government will no longer be able to pay all of its bills or repay its debts, leading to this economic superpower prioritizing payments, potentially defaulting on its debt and sending the global economy into a disastrous spiral. In 2011, after lengthy debates over raising the debt ceiling, America’s credit rating was downgraded by Standard & Poor’s, leading to increased volatility in the financial markets, a 2,000-point fall in the Dow Jones Industrial Average and, quite literally, billions of dollars in raised borrowing costs. US stock markets are already dipping again and a US default was recently described as “highly likely” by Treasury Secretary Janet Yellen in a letter to Congress, warning of a hard June 1 deadline.
If America’s debt ceiling — currently $31.4 trillion — is not raised, the US will still try to honor debt obligations, while pursuing “payment prioritization,” meaning that welfare, pensions and payments to soldiers would be the first to be cut. Such a situation would, of course, not be tenable for very long domestically, but also internationally if the US had to rely on increasingly risky auctions to replace maturing Treasury bonds. Even before a debt default, panic would spread throughout the world’s economy, stock markets would fall by an estimated 20 percent to 45 percent, and unemployment would rise by 5 percentage points, putting some 8 million Americans out of work and leading to a deep recession.
The effects would certainly not be limited to the US, as the dollar remains the world’s reserve currency, meaning confidence in the ability of other countries to honor their debts would also be shaken. This would cause mortgage and unemployment rates to rise globally, while adding “risk premiums” to oil and wheat prices, for example, thereby making food and fuel more expensive around the globe. The poor Egyptian fallahi woman trying to feed her family would be one of the first to suffer. As we have seen so many times, it is always the poor who pay the highest price for the failures of the most privileged; in this case, US politicians bargaining big for rather petty political gains.
As we have seen so many times, it is always the poor who pay the highest price for the failures of the most privileged
Hassan bin Youssef Yassin
The dollar, similar to Treasury bonds, is simply a piece of paper with a signature from the US Treasury on it, allowing people around the world to protect their wealth or savings, however small. America’s obligation is to protect this “certificate” as a valid and solid means of exchange. Clearly, the world cannot go through an annual birth by cesarean of new US borrowing limits to ensure that the certificates remain valid and the world continues to trust in the dollar, against the recurrent threat of irresponsible political squabbling between US political parties and branches of government.
The poor are, of course, unable to contract any debt and, therefore, the Egyptian fallahi woman will not be able to invest in her next harvest either, prolonging a cycle of poverty. Americans, by contrast, can borrow as much money as they want, and at the lowest cost. If America were to stop borrowing, a crisis affecting the value of the dollar and the viability of the US’ own economy would ensue, while the repeated political circus over the US debt ceiling would weaken the dollar in the long run, as confidence would be further eroded. In effect, the US party system is holding the world hostage.
Of course, some economists and political scientists have sought potential workarounds for these recurrent crises, in which the global economy teeters on the edge while US politicians act out their petty squabbling. One, almost humorous, suggestion is that the US government could ask for a commemorative $1 trillion coin to be minted and deposited in its accounts. Another idea is to employ the Civil War-era 14th Amendment, reaffirming that US government debt “shall not be questioned.” It could be used to request that the Treasury continue to issue debt bonds. By appropriating the “power of the purse” from Congress, however, the government would only vastly increase the ferocity of political infighting, not exactly inspiring confidence in America’s ability to manage the stability and trustworthiness of the world’s reserve currency.
Muddied money cannot be a global standard of exchange. Cleaning the mud off will make it lose its value. This is not what the world expects from America. The world wants to trust America and its dollar, praying it can be saved from the increasingly intense bickering that is poisoning not only American politics but also the future stability of the global economy and people’s livelihoods. With almost 90 percent of global foreign exchange transactions denominated in dollars today — at an average daily trading volume of about $6 trillion — the US debt ceiling risks to the global economy are all too clear. It is rather unfortunate that America and the world still have not found a way out of the repeated global hostage-taking of US debt ceiling debates.
America can only be strengthened by showing the world that every branch of its government takes its responsibility for the dollar and its attendant promise to global economic stability seriously. It should be unthinkable that petty squabbles between US political parties be permitted to threaten the livelihoods of billions around the world. It is time we all thought a little more of those less fortunate than us, instead of so selfishly trying to maximize the most insignificant of gains with no regard for the consequences.
• Hassan bin Youssef Yassin worked closely with Saudi petroleum ministers Abdullah Tariki and Ahmed Zaki Yamani from 1959 to 1967. He headed the Saudi Information Ofﬁce in Washington from 1972 to 1981 and served with the Arab League observer delegation to the UN from 1981 to 1983.