International Implications of the Debt "Crisis"

Since everyone else is talking ... or talking about how they’re not talking ... or not talking about how they’re talking ... figure I might as well talk about the debt ceiling kerfuffle.  Since I can’t claim any real expertise in American politics or economics, not sure I can say much about the domestic ramifications that hasn’t been said better several other places.
    But I think there are some things to be said about the international implications of the spectacle.  If there is a failure to raise the debt ceiling, the implications for America’s position in the international system and ability to exert positive leadership will be serious and dramatic.  Even if the worst outcome is avoided, this sorry episode will still mark another increment in the changing relationship between the United States and the rest of the world.
    There are, I think, three distinct dimensions to this summer’s spectacle, each of which is having a negative affect on the United States in the world: the long term implications of rising deficits, the immediate impact of the dangerous flirtation with default, and the consequences of failed governance.
   
Funding the National Debt: a problem, not a flaming crisis

    The long term implications of budget deficits are not a new issue nor a “crisis” that demands immediate resolution.  Lots of folks have pointed out for the much of the past decade (since the twin impacts of the Bush tax cuts and blank check financing for war in Iraq began to be felt) that at some point the deficit would be a problem because of the cost of borrowing on global markets to cover it.  The U.S. treasury sells bonds to generate the revenue needed to make up the difference between spending in a given year and revenue (the deficit).  The total of all those outstanding bonds is the National Debt.  The bonds get sold to investors, including rich folks, money managers, international banks, and foreign governments.  It costs you and me as tax payers a little something to meet the interest on those bonds. 
    [side note -- or rant -- the beguilingly simple comparison to the family budget that some folks love to make, as they piously intone “live within your means” is pretty lame.  For starters, there aren’t too many Americans who do not borrow money to buy things they could not otherwise afford, like houses and cars.  Secondly, governments are NOT like mom and pop sitting around the kitchen table ...  Some pretty powerful economic analysis suggests that effective governments should generally NOT balance their budgets, but should spend more to stimulate the economy when times are bad and build up a surplus to cool off inflation when times are good.]
    When it comes time to borrow, the United States has been in a uniquely enviable position since the end of the World War II  when the dollar became the international reserve currency.  Almost every country wants to have some dollars in its treasury so it and its citizens can do business with the rest of the world.  This means the U.S. can sell Treasury bonds with dollar amounts with lower interest than, say, Poland whose bonds come in zlotys.  (Zlotys aren’t very useful outside Poland except at selected arcades with old school zlot car tracks.)   The second major advantage to the U.S. of the fact that foreigners buy so much of our debt is that they are motivated to avoid screwing up the U.S. economy.  Yes, China already owns a large chunk of the U.S. debt and yes, China could really mess us up by refusing to buy any more.  But if the dollar collapses then China loses a great deal of money. 
    There is some point, and no one knows where it is, where U.S. debt gets so large that foreigners start to worry that we won’t pay off our bonds and begin to drive up interest rates on bonds.  That makes the debt bigger, of course, and worries foreigners even more, and raises interest rates and that hurts the U.S. economy and slows growth, etc. 
    The size of the debt needs to be addressed, but not in a fevered panic in the next two weeks. 

The “crisis” of 2011 could become real

    The current hassle over raising the debt ceiling is a manufactured “crisis,” driven by domestic political calculations.  But it is pushing the U.S. and the world much closer to a genuine crisis of confidence. 
    And that could be a major negative consequence of the debt ceiling brouhaha on America’s international position.  One of the things that has made U.S. bonds attractive is the belief that they are as good as gold.  Actually, they’re better than gold because bonds pay interest.  But if the U.S. cannot pay interest when it is due, even if it is only temporary, then the value of bonds themselves (some part of which rests on the fact that they always pay interest) drops.  So all of a sudden folks who hold a lot of Treasury bonds, like big global banks and major countries, realize they had less money than they thought and that affects lending and spending around the world. 
    What could and should have been a small, short term event threatens to mutate into a much larger, far more serious problem if it raises any doubt about the value of U.S. bonds.   

America as a circular firing squad

    The second major negative consequence of the current debacle for our position in the world is the perception that the U.S. has a dysfunctional political system.  The spectacle of a paralyzed United States government, the concern that even the most routine issues may threaten Armageddon, and the inability of presumptive leaders to lead hurts America’s image and interests. 
    The damage comes in two ways, I think.  At the elite level in foreign countries, it undermines leaders’ confidence in the U.S. as a consistent actor, a country that says what it means and means what it says.  At the level of everyday people, it gives “democracy” a bad name.  The argument people in the Third World (aka Global South) hear most often from authoritarian leaders is that “democracy” means chaos.  Everyday people in the Global South are no more, nor less, sophisticated than everyday people in the United States.  They are not deeply immersed in the ins and outs of issues and institutions, they’d rather watch CSI: Las Vegas, Desperate Housewives, or the Bold and Beautiful [the drama, comedy and telenovelas/soap opera series with the largest global audiences in 2010] than CSPAN or a lecture on the difference between a presidential and a parliamentary system.  But they do have images of other countries, they do think they know something about the world.  And many of them are aware of some kind of political imbroglio in the U.S.  This episode by itself is not going to change anyone’s mind, but it is going to have an erosive effect on perceptions of the U.S. as a beacon and model for how to organize a society.