Republicans go nuclear on Obama
US government shutdown: John BoehnerPhoto: EPA
Technically, the default will not occur until the US cancels one of its payments on existing bonds, but this nightmare scenario becomes quite probable if the Treasury can’t issue more debt. For every dollar spent on the federal budget, the US has to borrow 40 cents. If the debt ceiling is not raised, Washington will have to choose between two outcomes: default on its debts and crash the economy or pursue drastic budgetary reductions and crash the economy anyway.
Bloomberg reports that “House Republican leaders plan to bring up a measure to raise the US debt-limit as soon as next weekas part of a new attempt to force President Barack Obama to negotiate on the budget, according to three people with knowledge of the strategy. The approach would merge the disputes over ending the government shutdown and raising the debt ceiling into one fiscal fight.” While this might sound as a viable strategy of political arm-twisting, Obama doesn’t show any willingness to cave in to Republicans’ demands.
Obama made it crystal clear that he is not going to negotiate in order to end the government shutdown. He believes that Congress must act to reopen the government without additional conditions. Republicans don’t see it this way and there is no visible way for reconciliation.
If the crisis is not resolved until October 17th, both parties will get a reminder from Wall Street regarding their duty to keep the economy afloat. Most likely, such a reminder will be in the form a micro-crash of the stock market. Investors, both American and international, are concerned about the debt ceiling debacle and they will become increasingly worried as the “default day” approaches.
A government shutdown hurts the economy indirectly and slowly, while the failure to raise the debt ceiling will quickly lead to serious or even disastrous consequences. Judging by previous experience, a small market crash should be enough to force Obama and Republicans to negotiate an armistice and find a solution at least to the debt ceiling problem. If such a solution is not found quickly, then the bond market is likely to crash making the whole political fight absolutely meaningless.
A bond market crash will create a situation in which the US won’t be able to finance its budget and won’t be able to borrow more at reasonably low rates, virtually ensuring a default. This scenario will become likely, if both parties refuse to understand that they are actively working to transform a political crisis into an economic catastrophe.
The President made clear to the Leaders that he is not going to negotiate over the need for Congress to act to reopen the government, but the Republicans plan to link the debt ceiling exactly to this kind of negotiation.
While the country’s most recent elections were generally considered to be free and fair (despite threats against international observers), the current crisis has raised questions in the international community about the regime’s ability to govern this complex nation of 300 million people, not to mention its vast stockpiles of weapons of mass destruction.
Americans themselves are starting to ask difficult questions as well. As this correspondent’s cab driver put it, while driving down the poorly maintained roads that lead from the airport, “Do these guys have any idea what they’re doing to the country?”