America cannot live so carelessly forever - The Financial Times

America cannot live so carelessly forever -The Financial Times


October 7, 2013 3:49 pm

http://www.ft.com/intl/cms/s/0/33512640-2f38-11e3-8cb2-00144feab7de.html#axzz2h6VEFRPW

America cannot live so carelessly forever

By Gideon Rachman

Playing Russian roulette is never advisable. Congress may find a bullet in the chamber this time

©Ingram Pinn

Watching the US budget crisis unfold, I was reminded of a famous passage inThe Great Gatsby. “They were careless people, Tom and Daisy,” wrote F Scott Fitzgerald, “they smashed up things, and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together.”

Right now, the Republicans and Democrats in Washington are behaving like theTom and Daisy of global politics – a warring couple, whose rows seem more likely to damage innocent bystanders than themselves. American politicians seem confident that their nation’s wealth and power allow them to get away with careless behaviour that would be swiftly punished in a weaker and poorer country.

History suggests that this complacency is justified. Congress has played Russian roulette withgovernment shutdowns before – and the bullet chamber has always been empty. More broadly, the 50 years since the assassination of John F. Kennedy have thrown up repeated political melodramas – from Watergate to the impeachment of President Bill Clinton. Each time, many thought that the American system was unravelling. Yet, each time, the US bounced back. For while America’s political flaws are very visible, its economic and social strengths are too easily discounted.
By contrast, foreigners have sometimes paid a heavy price for careless behaviour in Washington. It is a standard, self-pitying complaint in Brussels that the crisis in the eurozone was triggered by the collapse of a US investment bank, Lehman Brothers. A large part of the rest of the world’s grim fascination with the budget crisis reflects the fear that if the US economycatches another cold, the rest of the world will get pneumonia. China has told the US not to imperil the value of its holdings of US Treasury bills and Christine Lagarde, head of the International Monetary Fund, has warned of the damage the crisis could do to the world economy. But such complaints are drowned out by self-interested bickering in Congress.

The sense that the US is prone to “careless” behaviour that puts others at risk extends to international politics. America paid a high price in lives lost and money wasted during the Iraq war. But the US has now gone home and lost interest. Iraq, meanwhile, is still in the grip of the terrible civil conflict that followed the overthrow of Saddam Hussein.

The current crisis evokes mixed reactions in foreigners. Many, like Ms Lagarde, know that the rest of the world could pay a heavy price for the folly in Washington – and genuinely long for the Americans to pull themselves together. America’s admirers wince at the sight of a nation that they hold up as a model, making itself look so bad. But among those that resent US global leadership, there is considerable schadenfreude at the sense that the Americans – who like to preach about democracy abroad – are making such a bad fist of democracy at home. The Chinese will also be delighted that America’s efforts to assert leadership in Asia at the Apec summit have been thwarted by the fact that President Barack Obama has had to pull out to attend to the crisis in Washington. As for Vladimir Putin, Russia’s president – who recently took to the pages of The New York Times to warn Americans against the dangers of believing themselves “exceptional” – he would doubtless take a certain pleasure, if the markets eventually told Americans that they were not so exceptional, after all.
Conversely, the fear for the likes of Mr Putin is that those careless Americans will get another free pass. For the fact is that the US is so important to the smooth functioning of the global economy that the rest of the world has a vested interest in overlooking reckless behaviour in Washington. The last time the US played fast and loose with the debt ceiling, in 2011, Standard & Poor’s downgraded its debt rating. At the time many commentators saw this as a historic turning point and predicted that America’s borrowing costs would soar. In reality borrowing costs stayed low. Tom and Daisy had got away with it, again.

However, the fact that America has repeatedly survived careless behaviour – and bounced back from crises – has bolstered the inward-looking complacency in Washington. That, in turn, seems to have persuaded US politicians that they can take ever greater risks with the nation’s finances. But repeated games of Russian roulette are never advisable. It is certainly possible that this time Congress will spin the chamber – and find that there really is a bullet in it.
If a compromise is reached before the US Treasury runs up against the debt ceiling on October 17, then this will probably just be a case of “crisis as usual”. But if America crashes through the debt barrier, things get serious. As Gavyn Daviesargued last week, it seems marginally more likely that the Obama administration will drastically cut back on current expenditure rather than default on debt payments. Moving overnight to a balanced budget would be a form of immediate forced austerity of the kind that has caused deep recessions in countries such as Greece and Spain – as they too have struggled to balance their budgets.

The difference would be that US austerity would be caused not by the pressure of the markets, or the IMF – instead it would be a self-inflicted wound that caused huge damage to ordinary Americans and to the global economy. That really would be careless.

gideon.rachman@ft.com

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