Shut and Down
Shut and Down
It has long been an axiom that for the globalised world to run smoothly, one needs good global governance. The recent political drama in Washington that has brought about a partial shutdown of the government and threatens a US default has proved another verity: without good local governance, globalisation could also go belly up.
The partisan squabble in the US Congress could bring misery to the world, which is heavily invested in US debt and relies on the American consumers’ boundless appetite. Unless the Congress agrees to what has been a routine increase in the borrowing limit by 17 October, the Treasury will run out of money to honour its obligations. By pushing the US to the edge of a default and threatening the global economic recovery, reckless US congressmen have underscored the price of close economic integration that has brought prosperity as well as peril. Some have suggested that by slowing down the purchase of US bonds, top buyers such as China could send a signal to these parliamentarians about the price of such brinkmanship. But that is unlikely to happen and even if it did, free-market ideologues might even rejoice that China is being hurt.
The Tea Party extremists seem to care only about winning the ideological battle. Republican house members cheered on the midnight of 30 September when their attempt at political extortion resulted in government shutdown. Undaunted by the damage it will cause to the economy, they seem ready to bring in even more destructive government default if they cannot roll back healthcare legislation, some environmental rules and tax reforms. The manoeuvre amounts to taking the creditworthiness and good faith of the country hostage to achieve their ideological goals.
Although the 40-odd Republican members constitute a minority in the GOP, which controls the House (with 232 members), they have succeeded in cowing more moderate members to join them.
With Tea Party activists deciding the fate of primaries many congressmen are afraid of losing their seats. Some commentators suspect that more than ideological concerns about keeping government out of healthcare or denying the reality of global warming, the extremists are driven by a desire to discredit America’s first black president.
A dismayed world can only wring its hands and helplessly watch the drama played out in Washington. The US Treasury secretary has warned that by mid-October the government coffer could drop to $30 billion against its average daily obligations of $60 billion. Part of these obligations are to pay interest to foreigners who have invested some $5.5 trillion in US debt, of which $1.2 trillion is owed to China (India’s stake is a meager $59 billion). A US default, first time in history, will send shockwaves around the world, roiling financial markets and pushing the already fragile global economy towards a severe recession. A default even for a short period would inevitably bring a rating downgrade, obliging the US to pay billions more in interest and a sharp slowdown of the economy from across the board interest hike. The collapse of demand that would follow falling stocks and soaring unemployment in the developed world could spell misery for emerging economies. Unbelievable though it may sound, some Republican legislators say they won’t be deterred by economic forecasts of doom as economists are often wrong.
For the sake of the world, one can only hope that, as in 2011 when a similar drama was enacted by partisan politicians, ultimately good sense will prevail and the world be brought back from the precipice. Even if the Congress succeeds in disarming their hostage takers, the experience of terror felt by global markets in the days before the feared default should be a reminder to all: just as a handful of terrorists armed with weapons of mass destruction can threaten an interconnected world, so can a bunch of ideologues in suits hijack the controls of a powerful economy.
The author is editor-in-chief of YaleGlobal Online, published by the MacMillan Center, Yale University