American angst

The debt problems currently plaguing the US government are showing that country's politicians at their angst-ridden and undignified worst. The world's largest democracy, and one which holds itself up as a model for other countries, is proving to be less than worthy. Were it possible it would be an invitation to bring many high-profile US politicians to account for bringing democracy into disrepute.


The cause of this undignified mess is, of course, the debt problems facing the Federal government. Unseemly arguments between the President, the Senate and the House of Representatives are doing little to deal with this financial time-bomb, likely to go off before the week is out. If ever there was a time to put partisan politics to one side and do right by the ordinary people the politicians are supposed to represent, this is it. However, US politics is not driven by rights and wrongs, but by fierce brand loyalty down the generations to one party or another. On that score we could perhaps blame the electorate: in a democracy you get the politicians you deserve! However, one would hope that politicians would show some evidence of leadership, to go beyond simple representation of the citizenship. A forlorn hope indeed.


So what is the cause of this political in-fighting? In simple terms the US Federal government has borrowed beyond its means. For ordinary people, firms, and smaller countries, borrowing beyond one's ability to repay can be fatal, both financially and otherwise. However, as the late J Paul Getty once noted, "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem." The US Federal government debt is of the order of $14 trillion. Whether or not that is a large amount is entirely dependent on the ability of the borrower to repay.


It is often the case that the amounts borrowed during "good" times are apparently easily serviceable. However, the problem arises when the times are no longer "good", and it becomes more difficult to repay the interest, let alone any capital repayments. This is something which has affected almost every government on the planet, most noticeably Greece and Eire. Now it is the turn of the US to deal with what is seemingly a no-longer serviceable debt. And the politicians are unable to agree on the details of how best to deal with the situation. The simple solutions amount to a few elements: (1) reduce government spending making more funds available to reduce the burden of debt over the next few years; (2) increase the taxation levels to help fund the debt; (3) some combination of both. The Republicans favour 1, the Democrats 2, and the President is arguing for 3. The closeness of the deadline suggest that only 3 will serve, yet the two main parties continue to quibble over the details. It is the modern equivalent of fiddling while Rome (in this case Washington DC) burns.


If Greece defaulted on its debt then it would find it more difficult to borrow in future. It would be regarded as a risky proposition. Its bond ratings would plummet, leading to higher interest rates on any future loans it might be able to organise. Modern history has shown this with Mexico and Argentina. However, the USA is on a different scale. Any default could be seen as possibly temporary—the result of the immaturity of bickering US politicians—or it could be seen as much more dangerous. A default by the US Federal government could lead to an implosion of the world's financial markets. The collapse which was narrowly avoided when Lehman Brothers went bankrupt could once again become a reality, a reality which no rational person wishes to contemplate. Financial economists refer to this as systemic risk: the possibility of the collapse of the financial system. For ordinary people it means the end of the world as we know it. No credit, a failed banking system, markets which seize up, etc etc.


All we can do is hope the US politicians will come to their sense before the eleventh hour. Only time will tell if sense will prevail, or if we really do stand on the edge of a financial precipice.