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Republicans and the US Debt Limit. The very real threat to the World Economy.

The dangerous consequences of the Tea Party victory are soon going to be felt and it will hurt.

While Sarah Palin chased around America parroting the term “American exceptionalism”, her Tea Party representatives are set to destroy American standing in the World.

If they fail to increase the debt limit the Country and the World will be in for a new wave of hurt.

On 20 January 2010, HJ 45 was singed in to law by President Obama. This was an increase in the debt limit to $14.3 trillion.

In the Senate, the vote to increase that debt limit had the support of only two Republican Senators. The previous vote to increase the debt limit before had cross-party support.

It now looks unlikely that any Senate Republican would vote to increase the debt limit and the Tea Party Republicans in the House are dead set against an increase.

There are two elements to the disastrous state of the US budget deficit. Part of the deficit is always going to be related to the health of the economy and the spending priorities of the Government. In a recession, the deficit is always going to grow because tax revenues dry up and expenditure on welfare benefits increases. Conversely that element will reduce as the economy grows. Then there is the structural deficit.

The US has a real problem with its structural deficit and Republicans refuse to see this. To drive a cuts agenda through in the UK, David Cameron coined the phrase “deficit deniers”. In the US it is the Republicans who are the real “deficit deniers”. They talk tough on the deficit but provide no solution to reduce that deficit. They also proudly display a horrifically dangerous level of ignorance about the difference between the deficit and the National Debt.

They want to play games with the US National Debt that could prove to be very dangerous to the security of the USA, both in the short term and the long term.

The structural deficit is the part of the deficit that will not go away with economic growth. The Bush tax cuts of 2001 and 2003 reduced revenues to the government without any corresponding reduction in spending. Bush exacerbated that revenue gap by fighting two wars and passing the Medicare Part D prescription drug programme. To tackle those the American government would have to account for Medicare Part D, increase taxes to pay for its activities abroad (or cut back on them heavily) and allow the majority of the Bush tax cuts to expire.

The expiration of that is relatively easy, Congress just needs to do nothing and those cuts will expire.

Still, even if the new Congress was able to take its giant axe to spending in order to tackle the structural deficit and if it looked at what revenue the Federal Government really needed and raised taxes accordingly, the deficit will not clear overnight. The Government will still need to borrow and that will mean that the debt limit will still need to increase, even if you closed down all of government departments tomorrow.

Republicans will need to vote to increase the debt. The Democratic Party may need to save Republicans from their reality lacking Tea Party wing, who will only be answerable to Rush Limbaugh and none of them will disobey him.

The consequences of the 1995 battle to raise the debt limit was hard-felt. Markets took frit. Government shut down. The Government shut-down was a by-product of the Republican battle, which cost them support among voters. The problem for now is that the US has just elected politicians who see that shut-down as their end game. Government closure would make them rejoice. it would however hurt America far more than 1995.

Nearly half of all government activity will cease overnight. To avoid a complete collapse of money market trust in the government of the United States of America, interest payments on the national debt would need to be maintained. Therefore all other payments would be at risk. This would include US operations in Iraq and Afghanistan, Social Security payments, Medicare payments and unemployment benefits.

Save for the Tea Party Republicans who may see that for a good thing, the economic consequences of such a shut down would be disastrous for the World economy.
It will make the USA an economic Pariah that once again plunged the World in to another financial melt down.

We have all become too painfully aware about global money markets and their importance to the World economy. We are also all painfully ware of the greater level of financial inter-connectivity. A level of inter-connection that far exceeds 1995 levels. The closure of a small bank in England changed the credit crunch into a financial collapse with domino effects killing the giants of the US banking Industry. A failure by the US to pay its bills will make that banking crisis look like a holiday.

The “PIGS” of Europe were forced in to financial melt down because they could not meet their debt. The impact of the debt crisis that hit Portugal, Ireland, Greece and Spain are still being felt in Europe.

The US has 200 sales of its debt each year. If it defaults, the only way to sell the debt would be to increase interest rates. Without a large increase the capital markets would flee from US bonds. The consequences of that would be felt across the World as US Treasury Bonds are the current safe-haven in this still wary financial market. If US loses her reputation, there are the BRIC Nations (Brazil, Russia, India and China) more than happy to take her place.

The $ is the reserve currency of the World based on a historical and strong assumption that the US will not default on its debt. It is also the reserve because there historically there was no alternative for the financial markets. Increasingly, that is no longer the case and Republicans should be wary of testing whether the World is ready for an alternative to the $ as a reserve.

The 1995 debt battle cost US taxpayers $800 million. The Treasury suspended all new debt issues and ceased the non-essential works. This included toxic waste clean-ups, disease control activities and law enforcement activities. The effects were minimised only because the Clinton administration had some head-room to operate. Some of them involved temporarily raiding the pension funds. In addition, the US was not involved in a major war in 1995. Very few of those options are available to the Treasury now and given that the US is at War, they would last for weeks and not months (at best).

The devastating consequences of this gamesmanship needs to be laid at the feet of the people who cause it.

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