US dances on debt's cliff edge
Winston Churchill famously said that, 'you can always count on Americans to do the right thing after they've tried everything else'.
Given the dangerous game being played between the White House and the US Congress on budget deficits and the debt ceiling, it seems that today's American politicians are determined to prove Churchill wrong.
Treasury secretary Timothy Geithner was all nervous smiles in weekend television appearances trying to reassure major market players that all would finally be all right and that a deal would be struck to raise the US$14.3 trillion ceiling on US debts before the August 2 deadline. The emptiness of his optimism was shown when he added that he hoped a deal would be on the table for the opening of Asian markets yesterday.
There was no deal, there is still no agreement and the loudest sound is cries of mutual blame and recrimination. The situation has serious repercussions far beyond the grave immediate issue of the US debt ceiling and whether Washington will be able to pay its bills after the weekend.
It involves the confidence of financial markets over the debt and credit rating of the world's biggest economy. It directly involves confidence in the US dollar, still the world's reserve currency. It affects confidence and growth in the US, with potential tsunami effects right round the world. This was seen as stock markets behaved nervously and commodities, including oil, fell sharply, while gold rose again.
But this is more than an economic story. It is further evidence of a global political deficit, the inability of political leaders to think beyond narrow partisan interests. European leaders finally got their act together last week to reach a deal providing Greece with an improved bailout package and taking a large step towards fiscal federalism. But, hold the back-slapping: the euro-zone members will have to triple their Euro440 billion (HK$4.9 trillion) bailout fund if it is to cope with problems in bigger countries such as Italy and Spain.
The US impasse by yesterday morning was as bad as ever. Talks between President Barack Obama and House of Representatives Speaker John Boehner, broke down bitterly. It seems that in the light of parallel talks going on in the senate by the 'gang of six' bipartisan senators to cut the deficit by US$3.7 trillion over 10 years, the president sought another US$400 billion in tax overhaul measures to raise that figure to US$1.2 trillion.
Boehner walked out, talking of 'betrayal' and refused to return telephone calls from the president.
'Dealing with the White House is like dealing with a bowl of Jell-O,' he complained. Obama's concessions to the Republicans have angered his own Democrats who claim that he has been weak, and that the poor and underprivileged will have to pay the bill while the rich walk away unscathed by tax increases.
Equally seriously, Boehner is going ahead with his own scheme to raise the debt ceiling by US$1 trillion, which would tide the country over only to lead to another furious argument next year about a further rise, right in the heat of the presidential election campaign, which would be a recipe for further disaster. Both sides, but particularly the Republican right, see the issue as a power play for control of the White House and Congress in next year's elections.
Much of the rest of the world may agree with British cabinet minister Vince Cable who said: 'The irony of the situation is that the biggest threat to the world financial situation comes from a few right-wing nutters in the American Congress.'
Larry Summers, treasury secretary under president Bill Clinton and Obama's economic guru until recently, urged politicians to look at the real issue - the US jobs deficit. Summers, now outside the White House bubble, is starting to make sense.
He said there was only a small chance of inflation and excessive borrowing, but a much greater one of a decade or more of stagnation.
'The right question to be focused on is how to stimulate demand,' said Summers. 'Look out there, guys. The treasury bond rate, treasury note rate for 10 years is 2.85 per cent. Nobody is failing to invest because 2.85 per cent is too much. They are failing to invest because there are no customers in their store. They are failing to invest because their factories are sitting empty. They are failing to innovate because they're not sure how large the market for the product will be.
'By the way, an extra per cent a year on the growth rate for the next five years will do more for the budget than any amount of entitlement cutting that's under discussion.'
Some big corporations are prospering, especially those outside the US, as strong second quarter earnings from Caterpillar, General Electric and McDonald's showed on Friday. US unemployment is 9.2 per cent, more than two years after economists declared the end of the recession. Andrew Sum, director of the respected Centre for Labour Market Studies at Northeastern University, said he had never seen labour markets so weak in 35 years of research.
Wages and salaries accounted for a mere 1 per cent of economic growth in the first 18 months after the formal end of recession, against 15 per cent after the 2001 recession and 50 per cent after the 1991-92 recession. At the same time, corporate profits accounted for 88 per cent of economic growth this time round, compared with 53 per cent in the 2001 recession and zero after 1991-92.
The big difference is that US companies have been increasingly expanding abroad while cutting jobs at home. In the decade from 2000, according to the US commerce department, US-headquartered multinationals added 2.4 million jobs overseas, but cut 2.9 million jobs at home. China and Asia generally may feel smugly happy that their economies are chugging along nicely. But they will have a price to pay if the US does not reach a deal.