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Page added on October 27, 2013

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A superpower at risk of slippage

Public Policy

It has been 10 days since the US government shutdown came to an end. And if the bond market were your guide, there would appear to be no lasting costs – the 10-year US Treasury yield dipped below 2.5 per cent this week for the first time since August.

Yet beneath the surface, Washington’s flirtation with a voluntary default has shaken confidence in American political institutions. There may be no immediate rival to the dollar as the world’s reserve currency. Markets are more preoccupied by prospects of a delay to the Federal Reserve’s tapering plans. But as John Kerry, US secretary of state, said this week, the world is now monitoring the US to see when it will recover its senses. It cannot afford to make a habit of political recklessness.
The fact that Washington is undergoing a crisis of will, rather than ability, is not particularly reassuring. There is no question that the Treasury’s has capacity to service US obligations. At about 75 per cent of gross domestic product, publicly held US debt is entirely manageable – and less than a third of that of Japan. And the US fiscal deficit is on course to drop below 4 per cent of GDP next year.

But the possibility that it may generate yet another fiscal showdown as soon as January or February is on everyone’s minds. Last week a senior Chinese official called on the world to “de-Americanise”. Neither the Chinese renminbi nor the euro are in a position to supplant the US dollar, which still accounts for more than 60 per cent of global reserves. But governments and private investors are far more alert to possible alternatives than before. History is littered with solid objects – and riskless assets – that have melted into thin air.

There are two further costs to America’s rumbling domestic crisis that are equally hard to measure. As Einstein once quipped, not everything that counts can be counted. The first is to America’s reputation. Bill Clinton observed that the US should lead by the power of its example, rather than the example of its power.

By that yardstick, the US is floundering. Behind confidence in the full faith and credit of the US lies global trust in US democracy. However, the international impact of Washington’s dysfunction is increasingly tangible. Last month China exploited President Barack Obama’s absence from Asian trade meetings to launch a non-US initiative of its own. And the US government shutdown delayed the critical second round of transatlantic trade talks. Many important bureaucratic functions were put on ice, including monitoring of financial sanctions on Iran and work on fundamental scientific research. As Mr Kerry pointed out, he “could feel and breathe” the world’s doubts about US democracy in his meetings with counterparts.

Second, the shutdown has further sapped confidence in the US recovery. Last week the delayed jobs figures for September showed that the US labour market looks once again to be stalling. US consumer confidence also dipped to its lowest level in almost a year. And the shutdown has shaved at least 0.25 per cent from US fourth-quarter growth forecasts.

The world continues to hang on every word of the Fed, which remains the only functional economic game in town. The chances are that it will delay tapering until March after Janet Yellen, the nominee to replace Ben Bernanke, has taken over.

Assuming Capitol Hill does not block her confirmation, Ms Yellen will quickly need to show she is in the driving seat. It would therefore be a great help to her – and to a warily observant world – if Congress could keep the car on the road between now and then. There is more at stake here than mere reputation. The status of superpower carries responsibility too.

FT



6 Comments on "A superpower at risk of slippage"

  1. DC on Sun, 27th Oct 2013 8:32 pm 

    Haha, the crisis for amerika isn’t ‘coming’-it has already arrived. They have no choice in the matter. What we saw recently as a fake reason for the shutdown, allegedly over the corporate money grab aka ‘Obamacare’. The next time the uS runs out of money, it be something else.

    The next phase of the collapse-will involve finding ways to cloak the crisis.Obama the drone-killn liberal was a good choice for the corporations. As long as hes around-he can be blamed every time the systems goes into another round of spasms. When the repubs put ‘their’ man in office-then the blame will be shifted to foreigners, immigrants, terrorist, whatever. But the real cause-amerikas endless QE, endless wars, and Wall St theft of the nations ‘wealth’, will go unreported and will not slow down. If anything they will accelerate-and so will the crisis.

    This article is a joke. There is no ‘democracy’ in the US and ‘will’ has nothing to do with it. A war-economy nation that produces nothing but CGI movies, weapons and toxic food, has more problems than its long-tarnished reputation.

  2. Norm on Sun, 27th Oct 2013 8:52 pm 

    What he said.

  3. Dave Thompson on Mon, 28th Oct 2013 12:58 am 

    Ya gotta figure the blame is going to some place like the big bad government. The multi-national corporate bankers, military industrial media complex will then swoop in to save the planet and set up a new world order. All the while pointing out how letting the “Freedom” of the “Free” and open market capitalistic system will save us all. RFID chips for all.

  4. BillT on Mon, 28th Oct 2013 2:10 am 

    What ‘super power’? Super debtor, maybe. Power? No!

    China can destroy the US with a phone call. Yes, it would hurt China, but not as much as some think and certainly less than a real blood war. At the cost of a few trillion Charmin dollars, the US would be crippled beyond repair.

  5. steveo on Mon, 28th Oct 2013 5:07 pm 

    DC wrote “When the repubs put ‘their’ man in office-then the blame will be shifted to foreigners, immigrants, terrorist, whatever.”

    That is a frightening thought, because the last time they were in power they started 2 wars.

  6. Arthur on Tue, 29th Oct 2013 8:31 am 

    …fully supported by the Dems and bastions of the American left, like the NYT.

    If you really believe that the Reps/Dems divide has any relevance for US foreign policy, you have some catching up to do.

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