Fight Racism! Fight Imperialism! 222 August/September 2011
On 30 June, the United States government had just $25m left in its usually fat piggy bank. In the world’s largest economy this is the smallest of small change. Normally this would not be a problem, since the US government can borrow up to a limit set by the US Congress. As government borrowing has increased, Congress has regularly altered this borrowing limit – 91 times since June 1940, usually about 300 days before the government runs out of money. Until now. As this paper goes to press, there is still no agreement on raising the US government’s debt limit and the deadline of 2 August, when the government totally runs out of money, is just days away. In the absence of any agreement, commentators have been reduced to putting a brave face on and nervously repeating Winston Churchill’s famous dictum that ‘The Americans can always be counted on to do the right thing… after they’ve exhausted all other possibilities’. Quite how ‘the right thing’ can be cobbled together by Congress in time is not all clear, however. If they fail, catastrophic consequences are likely as this key prop of the capitalist economy buckles.
US Federal public debt currently stands at $14.34 trillion – 95% of US GDP. This does not include the very substantial spending by the States, most of which in Britain would be counted as part of central government spending. As we have tirelessly explained (see No Cuts – Full Stop!), this huge debt has come about because of the inability of private capital to maintain its profitability since the 1980s. It has increasingly had to support itself on the crutches of debt. This debt has now become so overwhelming that the only way to maintain corporate profits and the lifestyles of the rich is to cut it. Both Republicans and Democrats are proposing huge cuts in public spending on social programs, Social Security (ie old age pensions), health services and education, putting the burden on the working people of the US. There are some differences about where exactly on the neck the poor are to be chopped, but both major parties completely agree on the need for cuts. There is argument over whether there should be some tax increases, but in the past this sort of difference would have been adjusted and a compromise reached. However, this has been made much more difficult this time round because of the influx of zealous ‘Tea Party’ representatives who are vowing to oppose any tax increases and who scoff at the idea that the US defaulting on its debt would create any problems. While failure to increase the debt limit is unthinkable, thinking up a compromise agreement has so far proved equally impossible.
If the US fails to raise its debt limit in time, the government will have to take dramatic steps to prevent default on its existing debt. The government will immediately suspend payment of Social Security and disability cheques, affecting tens of millions of people and taking billions of dollars out of the economy. It will do so in order to continue paying interest on US Treasury securities, plunging the US and international economy deeper into recession. Since the future ability of the government to pay interest and redeem debt will be uncertain, interest rates will rise. Stock markets will fall, the US dollar – up till now the world’s reserve currency – will fall as investors switch to apparently more reliable currencies. With borrowing both more restricted and expensive, cash will be hoarded, short-term liquidity will lock up and we will have a repeat of the Lehman crisis.
Even before the deadline, the lack of agreement is already having consequences. Money market funds are ‘rebalancing’ – dumping any assets which they expect to decline and replacing them with the safest stocks and securities. That the fate of the entire US and international capitalist economy can hinge on the antics of a handful of ultra-capitalist zealots in Washington shows just how crisis-prone and brittle capitalism has become.
Steve Palmer
