Despite apocalyptic scenarios for a U.S. debt default and worldwide economic contagion, there are several alternatives for preventing a global financial crisis.
A U.S. debt default will lead to the collapse of financial markets in different parts of the world and a collapse of the American dollar. Photo: Reuters
Intense international debate about the consequences of a U.S. default for the global economy opens up broad new intellectual horizons, enabling just about anyone following the economic trends or studying international relations to share their own theories about it. Yet, not everyone is ready to answer the difficult question of just exactly how a failure to increase the U.S. government debt limit will lead to a debt default and a financial crash.
In fact, a professional economist without too much exertion could realistically describe a scenario in which a failure to increase the debt ceiling would not automatically lead to a default.
However, dark tones and apocalyptic scenarios currently dominate the debate. Bloomberg recently added its "two cents" to the debate and predicted a global catastrophe because of the problems associated with U.S. government debt. According to Bloomberg, a debt default will lead to the collapse of financial markets in different parts of the world, a collapse of the American dollar and a long period of economic depression on a global scale.
In part, these concerns are justified. However, they can only be realized in a "chemically pure" political space where the two parties (the Republican Tea Party and the Democrats completely dedicated to Barack Obama) pursue their own goals, refuse to compromise and consider this negotiation process as a zero-sum game, in which any success on behalf of one party automatically means the other party’s defeat.
In reality, there are many pragmatists among the Republicans besides the Tea Party. Of course, they also would prefer to reduce Obama’s and the Democrats’ popularity rating before the 2014 elections, just like their "tea" colleagues do. Still, this group of members of the Republican Party is not prepared to pay for a somewhat lowered popularity rating of the active U.S. President by sabotaging the national economy.
A similar situation prevails in the Democratic camp. For a significant part of the ruling party in the White House, Obamacare is important because it provides additional votes. However, it is not so important that in order to preserve it, funding the U.S. government and servicing the U.S treasury debt should be stopped and the currently all-powerful dollar should be destroyed.
Thus, there is room in the U.S. Congress for successful negotiations between the Democrats and Republicans. All that is required in this situation is the art of negotiation on both sides. There is no doubt that they will demonstrate it. There is only a fear that we will have to wait for it. As Winston Churchill said: "The Americans always make the right decisions. However, only after they have exhausted all the other options."
Everything described above is only part of the problem that the U.S. hasn’t been able to resolve since approximately the second half of the 1960s. It was at this time that imports of industrial products in the United States began to grow rapidly and, at some point, exceeded the exports from the country. In the 1970s, the main American export was the export of capital to Europe, Asia and Latin America; it was then replaced by the export of its debt (treasury notes), denominated in U.S. dollars.
The main buyers of treasury notes became the oil monarchies of the Gulf, Japan and China; later, this list expanded to include post-Soviet Russia. During the period of time since the collapse of the gold standard and the Bretton Woods system (i.e., from 1971 to the present), the attractiveness of the dollar was based on trust, as well as the cautious and moderately conservative United States’ monetary policy, associated with Paul Volcker, who was the head of the Federal Reserve during the 1980s.
After that, the United States began to abuse the public’s trust in its national currency, which had become truly global and popular in all corners of the planet. Stimulation of demand in the domestic economy by attracting foreign investment and financing of the trade deficit by issuing debt securities cannot continue forever. This is the policy conducted by the U.S. for more than a quarter of a century!
Quite a few oracles in Russia and abroad predicted a collapse of the United States’ monetary system during this period. In principle, such predictions are correct. However, the collapse of the United States’ monetary system presently is not inevitable. It can be avoided by the progressive implementation of radical measures aimed at reducing the debt and the budget deficit, or it can be delayed by implementing half-measures.
At the moment, the U.S. administration is following the second path. The Republican Party’s conservatives call this path erroneous and suggest considering measures that are more radical in order to salvage the situation.
The world in which the United States is no longer the sole hegemonic leader, governing the liberal global economy and charging a fee for it in the form of the widespread use of its national currency, is described by one of the leading contemporary international affairs reporters, Robert O. Keohane, in his famous book “After Hegemony,” which was written in 1984.
The onset of the period "post - U.S. hegemony" was delayed by the Soviet Union’s collapse and by the formation of a unipolar world for a short period. Now this unipolar world is becoming outdated. In its multipolar version, there will not only be more independent centers of decision-making, but also a number of key currencies, competing with each other.
In the new situation, the United States will not have any opportunity to continue its current policy of increasing the public debt. On the contrary, it is only its radical reduction that gives the U.S. a chance to stay in the elite group of states with currencies capable of being a global standard.
This is exactly what the dispute in Washington between Republicans and Democrats is all about now. Obama's party wants to delay the adoption of the inevitable but painful financial and economic measures at the legislative level. Republicans prefer for these solutions to be adopted and implemented by the Democrats. The Republicans would like to see a repeat of history, which already occurred once in the late 1970s.
Then, the basic and very painful decision of the restructuring of the U.S. economy, hit by stagflation and the two "oil shocks," was implemented by Jimmy Carter’s administration. As a result, he lost the presidential election in November 1980, and Republican Ronald Reagan, who provided his party with control of the White House for a long 12 years, managed to remove all the "cream" from the implemented and proven successful measures.
It is important to note out that the current debate on the government debt ceiling and the necessity to take measures for its reduction is fundamentally ideological. Conservatives are guided by the "less socialism" slogan and are ready to stand up for their position to secure the future of the country and the entire liberal political and economic system. Their Democratic opponents, apparently, also see liberalism as their banner, but in their view, in the current post-crisis period, a "socialist" course of action will gain more support among the electorate, which is what was convincingly demonstrated by the 2012 presidential election.