For months, Republicans have used their new majority in the House of Representatives to block any move to lift the artificial cap on the amount the US government can borrow. If by this Friday they still refuse – insisting on up to $4trillion of spending cuts, excluding defence, and no tax increases as the price of their support – then the US will be unable to service its public debts. The biggest economy on Earth will default.
The results will be catastrophic, argues JP Morgan chief executive Jamie Dimon – a warning repeated by Obama. The US government will have to start to wind down: soldiers' wages and public pensions alike will be suspended. But in the financial markets there will be mayhem. Interest rates will shoot up and there will be a flight from the dollar. Banks, uncertain about their expected income from their holdings of US Treasury bonds and bills, will call in their loans, creating a second credit crunch. Some may collapse. Even to get days away from such a prospect, says Obama, will now have costs: every creditor to the US has been shaken to the core by American politicians not taking their responsibilities as borrowers seriously. They will exact a higher price for lending in future, even if a bargain is struck now.
These are politicians who in some respects have more in common with Islamic religious fundamentalists than the Enlightenment tradition which gave birth to western democracy.
But the Democrats cannot agree to the Republicans' absolutist demands, in part because the arithmetic of deficit reduction does not work without tax increases and cuts in defence spending, in part because they passionately believe that with taxes the lowest for 50 years, the US's rich should share in the pain and in part because in any human exchange there is an element of horse-trading. The Republicans want to suspend the rules by which not just Washington but any political system operates. They want to be political winners who take all, risking even the collapse of the US economy to get their way. More >>>
Location: Cayman Islands
