Al Khaleej, UAE
The US Temporarily Avoids Bankruptcy
By Ghassan Al-Azzi
Translated By Maggie Proctor
11 January 2013
Edited by Gillian Palmer
UAE - Al Khaleej - Original Article (Arabic)
The new year could have begun with the United States falling off the “fiscal cliff” if, in the final moments of last year, the Republicans and Democrats had not come to a deal that is closer to a sedative than a real treatment. The fiscal cliff was the mandatory establishment of harsh austerity measures, such as an increase in all types of taxes and on all strata of society, and a decrease in government spending in all sectors — an event which would have, in all likelihood, have led to economic stagnation and frustrated hopes for an escape from the crisis.
According to the deal, which Obama rushed to enact into law, taxation will increase on annual incomes over $450,000 per year from 35 percent to 39.6 percent. Both the Republican and Democratic parties took a step toward the other: the Republicans had rejected even a minor tax increase, particularly on income, and Obama wanted the taxation threshold to be $250,000 rather than $450,000. The deal also postponed the decision on the questions of decreasing public spending and raising the debt ceiling to early March.
This deal was reflected positively on Wall Street, where the exchange rate on the dollar increased against foreign currencies, despite the lack of a clear strategy for the next five or 10 years to end the frenzied increase in public debt, which has reached astronomical levels and may sometime soon overstep the GDP. The current federal budget is barely enough to cover the debt and spending on health and retirement; what is needed is a tax increase on one hand and a cut in government spending on the other. This, however, must be done in a studied way so as to avoid economic stagnation; it would require political courage from and steady cooperation by the two parties.
The deal signed at the start of the year illustrates awareness of the present dangers. Observers expected Republicans to reject an agreement that would rescue the Democratic administration from an inevitable impasse with the justification that President Obama had ultimate responsibility, as Americans elected him to bear responsibility. But they knew he had promised to increase taxes on the wealthy and keep them at the same level for the other 98 percent of Americans, a platform which Republicans rejected throughout the presidential campaign. Logic would then say that when Americans elected him they rejected the Republicans’ position; these Republicans now have permission to go along with public opinion and avoid being held responsible for an economic downturn that they would then be punished for in the upcoming legislative elections. This is how Obama achieved political victory over the Republicans, who were forced to accept something they would normally reject: a tax increase on the wealthy. However, this victory is still a temporary one; the real discussions — over education, health, defense, the new public finance law, retirement and so forth — remain deferred, and this postponement won’t last forever.
In the face of this there is the question over America’s defense budget, the highest in the world without question: Can it be lowered? The prevailing belief at present is that it’s sacred and cannot be questioned, but there many voices in Congress — Republicans among them — who have begun, at the least, to talk publically about this forbidden topic. Their argument is based on two reasons: The first is that logic dictates that when the United States gets out of a long war the defense budget should decrease, and they want to impose this same logic today after the end of the wars in Iraq and Afghanistan. The second reason is a call for reorganizing U.S. strategy needs from a number of historic senior national security officials, Republicans and Democrats, such as Henry Kissinger and Zbigniew Brzezinski, who believe “through smart actions” it’s very possible to significantly reduce military spending.
The United States did avoid falling over the fiscal cliff and adopted rescue measures that allow the country to continue incurring debt for two additional months, but if the debt ceiling isn’t raised after these two months the federal budget might not be able to meet debt obligations and therefore go bankrupt. At that time, they will have to rush to take immediate steps such as halting government spending in certain areas. It’s well-known that the American state borrows from capital markets because its financial income is less its expenditures. If it is prevented from borrowing enough it must cease spending more than what its tax resources permit. This means an end to spending in education, health, defense and other areas. This situation is more dangerous than the fiscal cliff, despite the use of certain “techniques” — such as printing more banknotes, issuing new treasury bonds, swap operations, debt restructuring, etc. — that can prolong the crisis and delay the payments. It is Congress that decides whether to raise the debt ceiling, and here it becomes a highly politicized issue in the framework of understanding or competition between Republicans and Democrats.
The problem is that when the crisis reaches a critical stage its effects could spill over America’s borders, certainly including Europe and possibly the whole world, where the dollar will no longer be the standard global currency. This crisis began in America in 2008 and from there flew to the four corners of the globe. But this time it could lead to the decline of America’s economic power in parallel with the rise of new economic giants and a restructuring of the international order in the direction of greater pluralism.
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