US: Anyone for Tea?

Alphen, Netherlands.  4 October.  All countries exist in a space between a mythical past and current reality.  However, few permit past myth to destroy future hope.  That is what 20 to 30 conservative Tea Party Republicans in Washington are effectively trying to do.   To their minds the Tea Party faction is standing up for the ‘little guy’ in the face of monstrous socialized government in the guise of Obamacare.  In fact, by closing down the US Government a few dangerously deluded American politicians are holding not just America to ransom but the entire world. 

 

That doyen of the Tea Party Rand Paul, the junior Senator from Kentucky, said recently, “Washington is horribly broken. We are encountering a day of reckoning and this movement, this Tea Party movement, is a message to Washington that we're unhappy and that we want things done differently”.  They may get their wish.

This is not the first time the US Government has been shut down by silly American domestic politics.  The last time was 17 years ago.  However, that shut down took place against the backdrop of a booming world economy.  Today, the world’s economy can best be described by the words of an old Sting song – fragile!

The actions of Mr Paul and his colleagues could well doom the world to an economic and financial crisis even worse than the 2008 banking collapse.  Indeed, without a bipartisan agreement to increase America’s debt ceiling from its current $16 trillion to $17 trillion the US could technically default on its debts.

Such a default would lead in turn to a crash in the bond markets as those holding American debt often in unstable regimes and mainly in Asia would rush to dump dollars.  Indeed, people in such places hold American debt precisely because as the world’s driver economy and home to the world’s reserve currency such nonsense should not in principle happen.

Given that fragility an American technical default would see the US economy contract sharply.  The value of the dollar would plummet whilst that of other currencies would climb sharply.  China would be particularly badly hit.  Indeed, Beijing is already facing falling domestic demand and is looking to re-ignite export-led growth. 

The implications do not bear thinking about. The US debt/GDP ratio is some 110% of debt to GDP, compared with for example the UK at 95.6%.  China’s debt to GDP ratio is believed to be between 230 and 240% and possibly as high as 400%.  In other words, if the Washington stand-off is not resolved soon it could well trigger the mother of all debt crises in China.  A Chinese debt crisis would make the Eurozone look like a walk in the park for the world economy.

Worse, the crisis would mark the end of the Bretton Woods financial system which placed America at the centre of world financial and economic power.  Indeed, the end of Bretton Woods would mark the end of the American age far more perfunctorily than a sudden decline in American military power.  Americans would also see US growth-killing borrowing costs soar to levels to which Europeans have become dangerously accustomed.

Emerging powers together with China and the EU would almost certainly push for a basket of currencies to act as the future world reserve with the mighty dollar reduced to being one in a ‘basket’ of reserve currencies.  America would in effect be shooting itself in the very foot Tea Party Republicans have lodged firmly in America’s mouth.

The implications of an American technical default for fragile Europe are clear.  It could cost up to $250bn to re-capitalise the Eurozone’s shaky banks.  The only reason the bond markets are not as yet panicking is that the European Central Bank said it would (unconstitutionally and illegitimately) ‘do all and anything’ to prop up the Eurozone economy.  In reality little or nothing is being done to reform the fundamental structural problems of economies such as Italy’s.  The merest shock could bring the whole Euro edifice crashing down.

It is therefore not without irony that the 1773 Boston Tea Party from which Mr Paul and his colleagues draw inspiration is itself largely a myth.  The myth has it that American patriots threw bundles of British-owned tea into Boston Harbour as a protest against an autocratic monarch trying to impose an unreasonable tax – the Stamp Tax.  In fact London was simply trying to get the American colonials to make a reasonable contribution to their own security.  The rest, as they always say is history…or rather myth. 

It would be an irony to say the least if a world financial edifice made in Washington is brought down by Washington.  Sadly such disgraceful Washington politicking makes it hard for those of us who believe in America to take America seriously at such time and that is profoundly dangerous. 

So, Mr Paul, you may see “things done differently” – disastrously so.  In other words grow up!

Anyone for Tea?

Julian Lindley-French