Sat. May 18th, 2024

Prof. ST Hsieh

Director, US-China Energy Industry Forum

626-376-7460

[email protected]

May19, 2023

The evolving US debit ceiling crisis is a black eye of the US government in front of the world. What a shame!

We are pretty sure that the US will not suffer any “default” because US politicians do not have the guts to fail flat on their face. They also understand that they do not know how to recover from a default. It is clear that President Biden bears major responsibility in this game of chicken with the Congress. He will pay the price because he has to “blink first.” The US voters will have the chance for a “pay back” when they go to the ballot box on November 5, 2024.

The US has a proud and unique constitution for governance. It was the envoy of the world nations, and the US has promoted the US system tirelessly for the world to emulate. Unfortunately, a political system is like any other piece of machine: the ability of the operator determines the performance. The US political machine is operated by three-coequal branches for check and balance. However, the President of the US is like a CEO and the buck stops “there.”

It is Biden’s call on how to deal with the Congress on managing the debt-ceiling. But as Biden’s show plays out in front of the world, he is losing ground at home and on the global stage every step of the way. The G7 summit in Japan was intended to show Biden’s leadership and manage major global affairs including the war in Ukraine war etc. Unfortunately, the critical question on the table is “will US suffer a default?” Why has a basic domestic issue of the US become a major topic for discussion at a global summit? Why the President of the US has to answer to other global leaders at the table on such a US domestic issue?

The US government will not default but President Biden’s credibility as a global leader is diminishing!

World watches in disbelief and horror as U.S. nears possible default

Rachel Siegel and Jeff Stein, (c) 2023, The Washington Post

Fri, May 19, 2023 at 3:01 AM PDT

Gathered last weekend at the Toki Messe convention center and Hotel Okura in Niigata, Japan, the world’s top economic officials were scheduled to discuss some of the biggest emergencies facing the global economy, such as the war in Ukraine and climate change.

But the finance ministers for the Group of 7 nations had another question for Treasury Secretary Janet L. Yellen: What is going on with the U.S. debt ceiling?

All of Yellen’s counterparts were aware of the potential global ramifications if the United States were to default on its debt – so aware, in fact, that many asked her privately for updates on the status of negotiations between the White House and House Republicans, according to one person familiar with the matter, who spoke on the condition of anonymity to reflect private conversations. Yellen told U.S. allies that she agreed that a default would be devastating and that resolving the debt ceiling was a top priority for the administration, the person said.

Talks over the debt ceiling also forced President Biden to cut short his own foreign trip, scrapping planned visits to Australia and Papua New Guinea after the G-7 summit so he can return to Washington on Sunday.

But well before that, the fight over the borrowing cap was alarming U.S. allies. Around the world, experts are watching in disbelief as the U.S. flirts with its first default, fearful of the potential international economic ramifications – and astonished by the global superpower’s brush with self-sabotage.

Analysts say the impasse jeopardizes America’s standing abroad. And foreign economists and policymakers are bewildered over why the United States has imposed a specific limit on its debt and then turned it into a political football.

“The U.S. Treasury market is Washington’s golden goose, and the market shows the golden eggs it lays are still very much in demand,” said Maximilian Hess, principal at London-based political risk firm Enmetena Advisory, which advises clients including credit insurers and other financiers. “And yet the U.S. has a rule in the debt ceiling that inexplicably says that the golden goose should be taken out back and shot unless it agrees to lay fewer eggs for a while.”

But many global economic and financial systems are set up in ways that generally benefit the United States – specifically because U.S. Treasury bonds are seen as reliable and safe investments. That makes the prospect that the U.S. government might be unable to keep issuing more bonds both befuddling and unnerving for many allies.

More than half of the world’s foreign currency reserves are held in U.S. dollars, according to the Council on Foreign Relations, and many nations look to Treasury bonds to safeguard their own economies and guard against drowning in debt.

The mere fact that a U.S. default is being talked about is enough to unsettle markets worldwide, experts say.

“It is perceived as an extraordinarily high level of dysfunction in an economy that provides the largest number of safe assets to the world, and is in principle seen as the most important cog in the global financial system,” said Eswar Prasad, an expert in international economics at Cornell University. “There is a real sense that the U.S. doesn’t pay much attention to the volatility and uncertainty it precipitates. That affects the rest of the world quite significantly.”

The debt ceiling is just one of many factors threatening the global economy. For some allies in Eastern Europe, the debt ceiling debate comes at a particularly important moment for U.S. strength. Michal Baranowski, managing director of the German Marshall Fund of the U.S., is watching the congressional fight closely from Warsaw, which has seen an influx of refugees from neighboring Ukraine since Russia’s invasion. A weaker U.S. on the geopolitical stage, Baranowski worries, could weaken support for Ukraine and, by extension, leave its neighbor Poland more vulnerable to Russia.

“For a close ally of the U.S. like Poland, the debate over the debt ceiling is unnerving,” Baranowski said. “We really need the U.S. as a strong leader in world affairs during this time of deep global instability. I worry that the debt ceiling debate burns up valuable political oxygen that I would rather the U.S. spend for leadership abroad. It makes the U.S. look inward-looking, at best.

“It would spark a global downturn that would set us back much further,” Yellen said in Japan last week. “It would also risk undermining U.S. global economic leadership and raise questions about our ability to defend our national security interests.”

“A no-show from a United States president will never be a good news story, but the garbled messaging makes Biden’s dismount look especially messy,” the Sydney Morning Herald complained.

Gordon Flake, chief executive of the Perth USAsia Centre at the University of Western Australia, was in Seoul at a conference when news broke and spread through a surprised crowd that Biden had canceled the Australia leg of his trip. Canceled summit aside, Flake said he worries about how a widening political divide – and more empowered House GOP – can interrupt U.S. diplomacy.

“The real issue is this feeds into a broader unease, if not distrust, in U.S. domestic politics,” Flake said, “and growing anxiety about the next election.”

Then there is a basic befuddlement over why this is happening in the first place. Other developed economies – including some in the European Union and places such as Pakistan and Malaysia – set their debt limits as percentages of GDP, according to research from the Atlantic Council, a think tank focusing on international affairs.

“Countries look around the world, and they just can’t understand it,” Lipsky said. “They can’t understand it because they don’t have a similar process. And they can’t understand that, even if you had a similar process, why would you risk defaulting?”

That question, and the scene playing out in Washington, is enough to persuade other countries not to go down this path, said Monica de Bolle, an expert on Latin America at the Peterson Institute for International Economics.

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