Editorial | US debt drama comes with a human cost
- Political rivals may have reached a deal, but it has exposed US political dysfunction, increased fears about economic hegemony and come at the expense of the welfare of ordinary citizens.
United States President Joe Biden and Republican House speaker Kevin McCarthy appear to have reached a deal over the so-called debt ceiling that threatened a sovereign default for the world’s richest country. The two sides may have avoided a self-inflicted calamity, but it will come at a significant cost as foreign countries and investors are left flabbergasted by the domestic political dysfunction of the United States.
Republicans have made the fight about excessive borrowing by the government, never mind that borrowing was already approved by Congress. This is down to a quirk in US law that requires a second congressional passage, which enables Republicans to exploit it to force cuts on unrelated, non-military spending such as social welfare and education.
The fiscal fiasco has had the whole world on the edge of its seat because US Treasuries and bonds are among the most liquid financial assets and have long been considered risk-free, at least until recently. As long as they enjoy pristine credit ratings and remain liquid, they provide “safe” investment opportunities.
That is why exporting nations such as China and Japan have traditionally put vast amounts of US dollars into the Treasuries market, which in turn help “finance” US borrowings at low rates.
Not surprisingly, thanks to Washington’s increasingly hostile posture and domestic political infighting, Beijing has been scaling back on owning US Treasuries. China, of course, is not the only one.