September 22, 2013 6:30 pm
Congress is putting the future of the dollar in peril
Fresh evidence of US self-harm would hasten diversification to other currencies
©Matt Kenyon
Bond markets are unfazed about the chances of a US debt default next month, when the national debt is once again expected to bump up against the limit set by Congress. Yet US politics is in worse shape than in the build-up to the debt ceiling crisis of August 2011.
That brush with disaster is becoming an annual event. Each time Congress plays chicken with the debt ceiling, it toys with the dollar’s reserve status. Should Congress miscalculate, America’s standing with creditors would take a big hit. The chances are that crisis will be avoided. But nobody, least of all the kamikazes who want to provoke default, should misunderstand the stakes.
There are more reasons to worry this time round. First, Capitol Hill’s calendar is unusually hazardous during a phase when the political climate is even more irascible than normal. As luck would have it, Congress’s mid-October deadline to raise the debt ceiling coincides with a probable budget crisis next week. Unless Congress passes a clean “continuing resolution” – a bill that would renew the next fiscal year’s Budget at last year’s level – the US government will shut down. The deadline is midnight next Monday.
Last Friday the Republican-controlled House passed a bill linking that approval to the defunding of President Barack Obama’s healthcare law, which goes into effect on October 1. There is no chance the Democratic Senate will pass the “defund Obamacare” bill. Even if it did, Mr Obama would veto it. Healthcare reform was enacted more than three years ago and has survived multiple challenges. It is Mr Obama’s most prized legacy. He is surely sincere in his threat to veto anything that would undo it.
By itself, a temporarily shuttered US government would not be a disaster. Washington’s last full-blown shutdown in 1995 did not hinder the US economy’s longest postwar expansion. But nor did it coincide with a battle over the debt ceiling. Congress has inured itself to budget crises over the years. It is now becoming perilously cavalier about US creditworthiness. Should senior Republican leaders feel pressurised to join with Democrats to prevent a government shutdown next week, their party’s fury will transfer to the debt ceiling two weeks later.
Second, the Republican leadership is weaker than it was in 2011. Two years ago, Mitch McConnell, the Senate Republican leader, helped avert a meltdown by allowing Mr Obama to raise the debt ceiling at the eleventh hour. This time he is facing a tough primary challenge from a Tea Party rival. Self-preservation will stop him from being part of the solution.
“Do you guys have any ideas?” he asked. A group of House Republicans has already drafted a bill to delay “Obamacare” for a year in exchange for raising the debt ceiling. Mr Boehner is reduced to following the crowd.
Third, many people underestimate the impact of a US default. This enables pro-default Republicans to avoid dwelling on the huge risk they are taking. The last big US market crash was in September 2008 after the collapse of Lehman Brothers.
Far from punishing the dollar, there was a global flight to safety. US Treasury yields also fell after Standard & Poor’s downgraded the US’s sovereign credit rating in 2011. Whenever America screws up, the markets reward it. Why should the next crisis prove any different?
Nobody can be sure. But even if the default were purely technical – if Social Security cheques were stopped but bondholders continued to be paid – it would be the first in the history of the republic.
The debt battle comes at a time when much of the world is bubbling with frustration at the US dollar. Having complained for years about the spillover from the US Federal Reserve’s quantitative easing, emerging markets have, since June, switched to panic about its impending tapering. Last week Ben Bernanke, Fed chair, unexpectedly stayed the jitters by postponing the taper. On top of concerns about the slowing US jobs market, he cited “fiscal uncertainty”, which includes the risk of a debt crisis.
Nobody questions America’s ability to service its debts now or in the future. But there are nagging doubts about its willingness. Congress will probably avoid triggering a default next month.
But the odds deteriorate with time. What about next year and the one after that? When you play with matches, sooner or later there will be an accident.
Copyright The Financial Times Limited 2013.
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