Published on October 21st, 2013 |
by Tanya Silverman
Image © Keith Ellison 2013
First Kick of the Mule: Global Concerns of the U.S. Shutdown
As U.S. federal workers returned to work last Thursday, effectively ending their furlough, we witnessed the end of the U.S. Government shutdown following the signing of an agreement between the Obama Administration and Congress to raise the U.S. debt limit. Obama has acknowledged ‘There are no winners here,’ encompassing attitudes to the impact of the shutdown, which began September 30th. The episode cost the American economy $24 billion in just 18 days. But this was not the only cost of the shutdown. The crisis has caused concerns globally. In this blog post we will explore some of the reasons why the shutdown was a cause of anxiety for the world’s economies and why since the end of the shutdown these anxieties have not entirely relaxed. I begin by exploring a little more about the shutdown itself.
“Whilst Obamacare is not explicitly tied to funding the government, it was used as a bargaining chip.”
The U.S., one of the world’s largest economies, had reached an outstanding debt of $16.699 trillion. A common metaphor used to describe this has likened it to ‘the world’s most maxed out credit card.’ This is not the first time a shutdown has occurred. There have been 18 shutdowns in 37 years. As outlined in the U.S. constitution, congress has one key duty – to pass spending bills that fund the U.S. government. Hardline U.S. conservatives in congress triggered the budget warfare this time, demanding that Obama cancel his healthcare renovation plan, ‘Obamacare.’ Whilst Obamacare is not explicitly tied to funding the government, it was used as a bargaining chip. A group of Republicans believe this signature domestic policy will have such fatal consequences for the U.S., that it was worth shutting down the government to challenge it.
The U.S. Federal government system, whereby congress can limit the powers of the president through a series of checks and balances, can often lead to a severe lack of consensus in policy-making procedures, such as Obamacare. Although consensus has now been reached, there is the question looming over every American – ‘what about next time?’ The new funding bill extends U.S. borrowing until February 7th, and funds the government only until January 15th. This leaves U.S. citizens, especially federal workers, feeling insecure about the future.
Although the shutdown has since ended, and federal employees are resuming their positions, the IMF (International Monetary Fund) has warned of future disasters – disasters that may culminate in much more economically fatal circumstances for the U.S. and for the globe. The IMF has also warned emerging market economies to prepare for some unpredictability. The IMF’s Managing Director Christine Lagarde welcomed the new deal but said that the still-shaky American economy is in need of more durable long-term finances.
Discussion of the U.S. fiscal crisis has primarily centered on the toll it has taken in its mother country and caused long-lasting damage to U.S. credibility worldwide. So whilst the few days of government shutdown have not created a ripple extending to the world’s markets this time around, the world’s nations expressed their concerns as to what could have happened if it continued, or what could happen in January/ February next year if the U.S. does not implement a long-term solution. Fears of a sovereign debt default are not irrational, with more recent examples including Russia in 1998, Argentina in 2001, and Greece in 2012. Each of these also instigated global financial crisis, paradoxically each required U.S. intervention.
Many columnists writing from outside of the U.S. have expressed anti- American sentiment. For example, Liu Chang of China’s Xinhua news agency has called for a ‘de-Americanised world’ in the wake of the fiasco. He wrote that raising the debt ceiling has jeopardised the dollar assets of the international community. When referring back to the ‘credit card’ analogy, if the borrower, the U.S, cannot repay the money borrowed, then the ‘bank’ (the world’s lending nations) is at risk of stagnation. China’s Ministry of Foreign Affairs may not voice the same opinion as Chang (who has been labelled as a propagandist) but has expressed concerns nevertheless. Instead the Ministry has explained that the U.S. and China are economically intertwined and they are hoping that the issue is resolved in the long run to ensure security of Chinese assets in the U.S. The realisation has opened a ‘Pandora’s box’ regarding the meaning for American interests worldwide. China is the largest single holder of U.S. government debt, with Japan a close second and sharing similar concerns. China requires the U.S. to purchase large quantities of dollars from Chinese trading companies to stop the Yuan from increasing in value.
“the shutdown could have posed a risk for Europe’s recovery from the last financial crisis”
Officials in the EU are also worried, saying that the shutdown could have posed a risk for Europe’s recovery from the last financial crisis. The U.S. has large business ties with Europe. France has expressed similar concerns, and its economy remains especially fragile following a double-dip recession. In Zimbabwe an American financial collapse would wreak havoc. The country adopted the U.S. dollar as an official currency back in 2009 to stem hyperinflation and create economic stability. If America goes down, it would certainly drag Zimbabwe along with it.
Outside the economic scope, but still intrinsically linked to it, the shutdown caused concern for bi-lateral political relations, and these relations could be harmed further in the event of another shutdown. The cancellation of Obama’s Asia trip for the annual APEC (Asia-Pacific Economic Cooperation) summit caused some unease. The lack of U.S. presence at the summit could be misinterpreted as Washington not taking its presence in the region seriously. This also meant a forfeit of the opportunity to push Trans-Pacific partnership (TPP) trade deals and to strengthen politico-economic ties with and between the emerging economies of Malaysia, Philippines, and Indonesia.
U.S. allies in Israel and the Arab states are also sensitive to any change in American political and financial engagement in the region. Arab governments and private investors are very invested in U.S. Treasury instruments and stock exchange. This has led to geopolitical anxieties as well as financial concerns. Foreign aid agencies were also at the tail-end of U.S. budgeting constraints with the U.S. unable to commit financial support to high-cost projects. This could become even more debilitating in countries where the U.S. has high stakes in diplomacy and security. For Israel there were delays in U.S. security assistance, with help being considered a ‘non-essential’ expense during the shutdown.
“the damage had already been dealt world-wide”
These concerns are extremely valid. Global impact as a result of American debt has occurred in our very recent past. Similarities can be drawn from the the Global Financial Crisis of 2007-2008, and can illustrate the resonating effects of U.S. domestic issues on the international community. Crises such as these are an inescapable fact in an international system comprised of ever-growing globalisation. The 2008 Financial Crisis originated from the bursting of the U.S. housing bubble which peaked in 2006. It was triggered by U.S. policies that provided easier loans for borrowers who were encouraged to seek home-ownership. In its immediate aftermath palliative fiscal policies were adopted to lessen the blow to the U.S. economy, but the damage had already been dealt world-wide. Seemingly domestic issues, such as U.S. housing, lead to economies the world-over slowing down and suffering large losses as credit tightened and trade and investment declined.
The side effects led to the European Sovereign Debt Crisis, limited prospects for economic global growth this year and next, and much closer to home the resulted in high unemployment and household debt. The impact of this was felt across communities the world-over, leading to political instabilities resulting from protest movements such as Occupy Wall Street, Communist protests in Russia, and the UK’s 2011 anti-austerity protests. The 2008 crisis still continues to provide obstacles to full-recovery for many of the world’s nations.
So what does this all mean for the near-future? Will another global financial crisis occur in the wake of American fault lines if the U.S. defaults on its debt obligations come January? Despite the history of U.S. Government shutdowns, it’s not to say that the future is bleak for the world’s economies. Financial analysts have predicted another shutdown is unlikely, and U.S. representatives have assured that this government has learnt from its recent mistakes. In the words of Mitch McConnell, Republican leader in the Senate: ‘there’s no education in the second kick of the mule.’
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