U.S. Game of Chicken
Threatens Creditors and Global Economy
Does the
U.S. political crisis demonstrate what Beijing has been saying for years: that
it is dangerous for U.S. creditors to allow the dollar to continue as the global
currency of choice? According to this article by Li Xiangyang for the state-run
People's Daily, until the dollar is dethroned, holders of U.S. sovereign
debt 'must either endure the enormous immediate financial risk brought about by
a U.S. default, or hold additional U.S. debt at their peril.
The dispute between the Obama
Administration and the U.S. House of Representatives about whether to raise America's
$14.3-trillion debt ceiling is becoming ever-more intense. If the two sides fail
to reach a consensus by August 2, U.S. Treasury bonds will at the very least
face the risk of a "technical default."
Both sides are trying to use
this risk to coerce the other side into submission. This not only reflects real
differences between U.S. political institutions and political
parties, but threatens to have a major impact on the global financial system.
As the issuer of the global
reserve currency, the United States has involved the interests of global creditors in its
domestic political struggle. Even if the two sides reach consensus before the
deadline, the U.S. has set a bad precedent by ignoring the global economy and
the interests of international creditors.
In fact, as early as May 16, America's
total national debt reached the debt ceiling, setting a 60-year high. This is
the result of the long-running debt-driven consumption policy adopted by the U.S.
In line with past practice,
the White House should be able to obtain Congressional authorization for raising the debt
ceiling. After all, Congress has raised the debt ceiling 16 times since 1993. But
this time, in response White House please to raise the debt ceiling before upcoming
general elections, the Republican Party, through the House of Representatives, is
demanding new obligations requiring cuts in federal spending of $2 trillion over
the next 10 years - and without tax increases.
For the Obama Administration
to accept such conditions could result in Obama losing his bid for reelection
in 2012. On the other side, at least theoretically, if Congress fails to raise the
debt limit by August 2, the government will be unable to pay interest due on
its debt (the next interest payments to creditors are due on August 15).
As a result, the Obama Administration
would have to suspend pension checks to retirees and cease interest payments to
foreign creditors. Such an event would likely have catastrophic consequences
that neither the United States nor the global financial market can bear.
Nevertheless, the White House and Congress continue to use this likely catastrophic
outcome as a way of forcing the other side to submit.
Although clear warnings have
been issued by the world's credit rating institutions about the increased risk of
default posed by U.S. national debt and the trade volumes of credit default swaps,
chances that the United States will face a sovereign debt crisis like Greece
has are very slim.
First, the latest statistical
data show that investors remain interested in purchasing newly-issued U.S. debt.
Second, a “technical default” won't prompt central banks in other nations, which
are the primary holders of U.S. national debt, to dump it.
Foreign holders of U.S. debt confront
a serious risk. Because U.S. political parties only consider their own interests
and dare to ignore those of foreign creditors, it is very likely that sooner or
later, America will harm the interests of foreign creditors for its own
political, economic or security interests.
Posted
by WORLDMEETS.US
In other words, the U.S. may
use the possibility of a debt default to threaten other countries. This is the horrific
systematic risk hidden within the current international financial system. The
U.S. debt crisis poses a real dilemma for foreign creditors. They must either endure
the enormous immediate financial risk brought about by a U.S. debt default, or
hold additional U.S. debt at their peril.
At the same time, the U.S.
debt crisis serves as a wake-up call to China, the largest foreign holder of U.S.
Treasury bonds. China must stop increasing its already massive holdings of foreign
exchange reserves and be alert to the national security and national financial risks
inherent in excessive U.S. dollar assets.
There is a growing consensus
in this post-global financial crisis era that the dollar-centered system of international
currency exchange should be reformed as quickly as possible. Getting rid of the
dollar will serve not only the interests of creditor countries, but ensure the
stability and sustainability of the international financial system.
*Li Xiangyang is director
of the Institute of Asia-Pacific Studies under the Chinese Academy of Social
Sciences.
