JNN 18 Oct 2013 Washingoton: President Obama and Congress have signed off on extending the debt ceiling through to February. The new legislation only temporarily solves the US budget dispute, begging the question if America will ever limit its borrowing.
The extension deal will reopen the government after 16 days of partial shutdown and fund spending through January 15 while extending the $16.7 trillion debt ceiling through to February 7. The next major deadline is the December 13 target date for budget negotiations.
In three months’ time, US policymakers will again rehash the budget and the debt limit, which billionaire Warren Buffett called a “political weapon of mass destruction” in an interview with CNBC, saying it shouldn’t be used by politicians to settle budget disputes, as it brings real financial harm.
Although US policymakers haven’t specified the new borrowing limit, the Bipartisan Policy Centre think tank estimated the debt limit should be raised by another $1.1 trillion to help Washington cover its obligations through to December 2014.
Standard & Poor’s estimates the shutdown cost the US economy $24 billion, or $1.5 billion per day, the rating agency said on Wednesday. The agency also believes the shutdown will pare fourth quarter GDP by 0.6 percent.
Even though the White House and lawmakers nearly avoided a technical debt default this time around, the solution is only temporary.
Wall Street rejoiced after news broke the Senate reached a deal to avert a default, the Dow Jones Industrial Average soared 200 points. At the close of the New York Exchange, the Dow Jones climbed 1.36 percent nearly reaching a record, the S&P 500 increased 1.38 percent, and the NASDAQ Composite jumped 1.20 percent.
Asian floors met the news with split enthusiasm, but general market sentiment was high on news the world’s largest economy wouldn’t experience a sovereign debt default.
“There will be resurgence in global markets until we come to the next round of discussions in February next year,” Malcolm Coates, a partner at Deloitte CIS, wrote in a note to RT.
“Can the US afford to default? The answer is a resounding no. There is nothing to gain from a default,”Coates told RT.
The sky is falling!
“The short turnaround for politicians to negotiate some sort of lasting deal will likely weigh on consumer confidence,” S&P wrote.
The political stalemate in Washington has already prompted consumers to devalue their outlook of the American economy, and hit its sharpest one-week drop since the collapse of Lehman Brothers.
“If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their check books. That points to another Humbug holiday season,” the agency said in their report.
When Congress neared the ‘fiscal cliff’ in the summer of 2011, consumer confidence fell to a 31-year low in August.
The beauty of the debt is its payment
Coming very close to defaulting on their debt and a last minute limit increase isn’t a new practice in Washington. The US debt ceiling has been in place for nearly a century, and the country’s policymakers have always raised their spending powers, simply borrowing money and writing a big ‘IOU’ to the American people.
America’s debt ceiling, or the amount of debt the government can hold, has been increased 79 times since 1960, under both Democratic and Republican Presidential administrations. The outstanding debt of the world’s largest economy is currently $16.7 trillion, and is spread through domestic and foreign debt.
“Nobody’s ever been this deep in debt and its going higher and higher,” said Jim Rogers, chairman of Singapore-based Rogers Holdings, told RT.
Investors and central banks shouldn’t continue fixating on the politics, but on the growing danger of the debt itself, Martin W. Hennecke, chief economist at Henley Group Ltd, told RT.
“…the real problem is not a debt ceiling, the problem is a debt. And a real issue, from our point of view, the investors and the central banks should be looking at is the danger of it growing and now, more recently, it’s coupled together with the issue of rising interest rates,” Henley Group said.
Rising interest rates will be important to watch because if Treasuries rise, paying off debt will be more expensive for the US.
“Any further increase in the interest rates, generally and on Treasuries, would send the United States into default, not just by disagreement, just because they run out of money,” Hennecke said.
The budget wars in Washington give investors a hint that policy makers will likely delay tapering their $85 billion-per-month bond purchasing program, known as quantitative easing. The Fed surprised markets on September 18 when they decided to refrain from reducing bond purchases.
“I think they are more likely to continue easing policies. Maybe they will expand their quantitative easing rather than tapering, because tapering would immediately cause the interest rates to go up,” Martin W. Hennecke, chief economist at Henley Group Ltd, told RT.
The Beltway budget kabuki – aka shutdown – is over. But no ‘terrorist’ or dejected Hollywood screenwriter could have come up with a worse PR move and marketing strategy for brand USA.
Stocks won’t tank, interest rates won’t spike. We will have no rising costs and no weaker US dollar – at least for the next three months. Yes, because these are only stopgap measures.
Not to mention that the US’s biggest creditors – from China and Japan to Brazil – would rather see Washington taking active steps to clean up its horrendous financial act instead of just hiking up the debt ceiling.
But this is not the key story. The key story is how Washington’s paralysis was the straw that broke the dragon’s back; how it led China to abandon its Deng Xiaoping maxim of carrying a low profile, and start saying out loud what it really wants; a radical change of the rules of the game.
The crucial exhibit is the by now famous Xinhua editorial calling for a “de-Americanized” world.
Here, at Asia Times, I had a first shot at examining it.
So what does China really mean by ‘de-Americanizing’? For starters, Beijing called the US credibility bluff as the leader of the international financial system. Beijing was very much aware of how the real‘international community’ interpreted it. On one side the shutdown debacle. On the other side, an economy growing 7.5 percent a year, with consecutive, massive trade surpluses and over $3 trillion in foreign reserves.
Beijing’s offensive had been brewing for a while. It started with Russian President Vladimir Putin (fully supported by China) humbling US President Barack Obama and teaching him a diplomatic lesson in the Syrian chemical weapons dossier.
It continued with Chinese President Xi Jinping’s wildly successful tour of Central Asia, followed by another successful tour of Southeast Asia, which included Xi as the sole superstar at the APEC summit in Bali vis-à-vis no-show Obama.
Incidentally, in 1998, when the Asian financial crisis was still raging, then-President Bill Clinton also skipped a visit to Asia. This is what happened next; Asia turbocharged regional cooperation, and slowly but surely China began to extend its influence and trading power.
The crown in this new success story was Xi actively promoting – from Central Asia to Southeast Asia – a twin, overland and maritime, 21st-century Chinese version of the Silk Road.
Even the Washington Post was forced to wake up to a reality Asia Times had been reporting about for weeks, although, predictably, they totally missed the point, marketing the complex Chinese strategy as a response to former US Secretary of State Hillary Clinton’s ‘vision’. Howls of laughter could be detected in business centers from Shenzhen to Istanbul – as if a New Silk Road could possibly qualify as yet another product of American exceptionalism.
Feel free to bask in our connectivity
For all its immense internal problems and sociopolitical challenges, China also has every reason, long-term, to be on a high. This has everything to do with the productivity of 20 percent of mankind being unleashed wave after wave. The US underestimates Chinese resolve at its own peril. In 2012 China’s GDP per capita was around $6,100 (compared with $50,000 for the US). Beijing will go no holds barred to quadruple it by 2020.
Imagine a country that in the foreseeable future remains the key node of the global supply and production chain – the Supreme Trading Power.
Imagine a country that by 2020 will have around 195 million university graduates – which is more than the entire US workforce.
Imagine a country engaged in the most astonishing urbanization process in the history of the world – yielding 221 new cities with over 1 million people each by 2025, most of them, of course, voracious consumers.
Imagine an Iron Silk Road – also known as the Third Eurasian land bridge, a 15,000km high-speed rail network – linking the southeast port of Shenzhen; Kunming, in southern Yunnan; and Xinjiang, in western China, to Myanmar, Bangladesh, India, Pakistan, Iran, Turkey and then all the way to the mega-port of Rotterdam. That translates into China significantly less worried about shipping across the Indian Ocean through the bottleneck of the Strait of Malacca, which could one day be blocked by US warships.
Imagine the Chinese-financed cousin of the Panama Canal; the $40 billion, 286km Nicaragua canal linking the Caribbean to the Pacific.
Imagine the port of Lianyungang as the departure node for the Second Eurasian land bridge linking China to Kazakhstan, Russia, Belarus, Poland and then all the way to the juicy markets of the European Union.
This is what the collective leadership in Beijing is imagining; the mega-connected largest economy in the world. And when that happens, new rules must apply.
Don’t take your eyes off the ‘petroyuan’
Make no mistake; the collective leadership in Beijing well knows that a slow US decline has been an ongoing proposition since the 1973 oil shock – in parallel to the US dollar losing its value since the US ended its tie to gold in 1971.
The corporate US response to the rising cost of labor in the West plus automated mass production was to transfer practically the whole American industrial base to China, thus multiplying its profits (and in most cases paying for the delocalization through tax breaks).
In the long run, Asia could not but win. Washington tried all sorts of monetary scams to slow the decline. To no avail; productivity kept falling in the West and rising in Asia.
And then the Federal Reserve kept printing paper like there’s no tomorrow, buying bad debts from ‘too big to fail’ banks and US Treasuries, and thus funding Washington’s ballooning spending.
Beijing still buys US dollars only because – for the moment – this is the global reserve currency. Dollars are needed for the oil trade. Beijing would rather spend its humongous stash on real acquisitions, and not just US Treasury bonds.
Beijing’s game, in a nutshell, is to bypass the US dollar by all means available. That’s the idea behind setting up currency swaps with over 20 of its top trading partners – from BRICS countries to African commodity producers and strategic energy partner Iran. China is slowly but surely driving the progressive global flight from the US dollar.
Washington’s mob tactics forcing the shady, corporate-concocted Trans-Pacific Partnership (TPP) over Asian nations treated more like subjects than partners also helps. As for the much-hyped‘pivoting’ to Asia, most players – apart from Japan and the Philippines – certainly see which way the geopolitical and geo-economic wind is blowing.
In the Big Picture, there’s still no visible way out from casino capitalism – featuring monopoly money and stock exchanges and commodity prices totally controlled (and rigged) by computers.
Yet even the IMF has called for a new global financial architecture. Beijing bets on an endgame of the US dollar as reserve currency being replaced by a basket of currencies, including the IMF mechanism of Special Drawing Rights (SDR).
At the same time Beijing – as well as Moscow – know that for the system to change, it’s essential for a new reserve currency to be totally backed by gold (or silver). So part of Beijing’s plan is to accumulate gold by all means possible to back up the emerging, convertible yuan. Of course this will take time. But Beijing has been at it for five years now; the yuan may become fully convertible as early as 2017.
The real game changer will happen when the petrodollar, essential for the awesome American military machine to be financed by the rest of the world, meets its match. That would imply the – for the moment unforeseeable – possibility of the House of Saud and other GCC petro-monarchies willing to embrace the petroyuan, as in China not having to use US dollars anymore to satisfy its energy thirst.
Only then we will be living in a ‘de-Americanized’ world. And make no mistake: this is the desired endgame of China’s long game.