We are like a blindfolded man walking towards a cliff, and if we keep walking in that direction, very soon we will fall off.
That’s how Democratic Senator Chuck Schumer described the looming crunch over the debt crisis in the USA on the 7.30 Report last night. The man leading the charge for the Tea Party right of the Republican Party is Ted Cruz:
This article suggests that he knows exactly what he’s doing. Beyond getting rid of Obamacare, he’s destroying the Republican Party as we know it, to be remade in the image of the Tea Party. He also has an eye on running for president in 2016.
On the remake of the Party, most conservative Republicans fear they’ll be done over by the Tea Party come preselection time because it is so well organised, and, I believe, supported by Koch Bros funding.
On the presidency, there is a suggestion that he believes Obama will eventually be blamed for the chaos if the US defaults. There is another suggestion that he really is ignorant of what will happen if to the world if the US defaults.
Overnight our time a deal was concluded, I think essentially to kick the can down the road, as they say, until next February. Meanwhile Citigroup had already liquidated US Treasury bills falling due around the end of this month and reduced its exposure to government bonds expiring through to mid-December. That is, a major American financial institution was getting effectively downgrading what martin Wolf of the Financial Review described as “the world’s most important safe assets.” Defaulting is likely to be “a huge disruption to market liquidity and credit across the world.”
Damage has already been done to confidence in the American economy and currency which have acted as a stabiliser on the world economy in the past. Certainly China is worried about its $1.3 trillion exposure. According to Alan Kohler Japan is in for almost as much and the Middle East oil states are heavily exposed. All will be looking to diversify in the future, which will in any case depreciate their US$ holdings.
Australia, we are told, doesn’t hold a lot of US Treasury bonds. Effects here are nevertheless significant. Our dollar is likely to remain high and conditions in the non-resource sector are likely to remain difficult.
There is a question of the true deadline, which has been nominated by the US treasury. Seems at that point they will be down to their last $30 billion, plus tax receipts of $7 billion each day. On 1 November, however, non-interest payments $67 billion are due, plus $36 billion in interest payments on 15 November. The real problem is the big pile of $17 trillion of US debt.
Ironically the President has the power to raise the debt ceiling in an emergency. Martin Wolf tells us that he is faced with a “trilemma” He can ignore the debt ceiling and unilaterally issue new bonds. He can unilaterally raise taxes. He can unilaterally cut spending. But in each cae he would be usurping Congress’s normal functions.
Yet if he gives in to the demand of junking Obamacare, which is the law of the land, he would be encouraging extremely bad behaviour. Wolf’s suggestion is to get rid of the debt ceiling which he describes as “an invitation to mischief.”
Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund, goes into some of the nuts and bolts of the effects of default in the US and elsewhere. It’s not pretty, and potentially worse than the GFC. Ironically the GFC strengthened the US currency as a safe haven:
investors piled into US government bonds, because they offered safety and liquidity – prized attributes in a crisis. These are precisely the attributes that would be jeopardized by a default.
BTW Cruz is the son of Cuban refugees, born in Alberta, Calgary, and is the junior senator from Texas, only in his first term in 2013. His father, once in oil, is now a Baptist minister. I believe the Tea Party has roots in southern racism. A guest on Late Night Live the other day, pointed out that it also has an anti-communist Cuban connection.