American Debt: The Real Negotiation isTaking Place in the Republican Camp

When it comes to the crisis in America regarding the debt ceiling, the Republican Party is leading the debate. However, limits must be defined quickly so that the country is not plunged into economic chaos. Ultimately, the Republican position will result in certain losers; it remains to be seen if that will be the tea party or the economy.

The Republican John Boehner, Speaker of the House of Representatives, indicated several months ago that he would raise the debt ceiling if this measure was accompanied by an ambitious debt reduction plan. President Barack Obama had no other choice but to agree to his demands, since the House of Representatives, the majority of which are Republican, must approve the agreement that is reached.

Obama, backed by the majority of Americans, went with a balanced approach, based on both a reduction in expenditures and an increase in taxes. The proposition consisted of a three dollar cut in expenses for every dollar increase in revenue in order to achieve a total reduction in the debt of $4 trillion over the next 10 years.

If this proposal had come up beforehand, it would have been a real snake in the grass for the Democrats because it would have forced them to accept huge budget cuts in programs which constitute the heart of the American social safety net. It’s also the reason why John Boehner, at first glance, was open to the proposition.

However, on July 9, Boehner came up against the opposition of members in his party, led by Eric Cantor, the number two in the House of Representatives.The party reminded Boehner that the large majority of elected Republicans had pledged that under no circumstances would they increase taxes, and that this debate would not make them break that commitment: Now we see who gets credit for clarity.

We still expect that Obama will persevere, by all possible means, to persuade the Republicans to opt for a strategy that includes raising taxes. This is exactly what he attempted to do during his address to the nation on Monday evening. But it would be surprising if Boehner made a U-turn on the issue, considering the response he has already received from his caucus.

The 2012 risk

If the agreement regarding the reduction of the debt can only rest on a reduction in spending, it should be on a reduced scale. Rather than talking about a $4 trillion reduction in the debt, it might have to be limited to $2 trillion, or maybe even as little as $1 trillion over the next 10 years.

So, if the reduction in debt is minimal, that would mean that the United States would fall once again into the same psychodrama in the first half of 2012 when it tries to establish a new debt ceiling. This would not be undesirable for the Republicans, who would take advantage of the opportunity to accuse Obama, in full electoral campaign, of plunging the country into an uncontrollable spiral of debt.

Credit rating agencies could decide to penalize the United States. Standard & Poor’s indicated last week that they may lower the United States’ AAA credit rating, even if an agreement was reached to raise the debt limit. If the debt reduction plan is not sufficiently convincing, the agency could well go ahead with lowering the rating.

How to negotiate with kamikazes?

The current deadlock arose due to the tea party coming onto the scene after the midterm elections in November 2010. This drove the Republican Party even further towards the right and made them more inflexible. Its members intend to save the country by creating some order in the public finances. They have had enough of seeing the debt problem worsen year after year and believe that if they don’t act now, the country will be in a state of ruin, and only a mountain of debt will be passed on to future generations.

No compromise is to be expected from the tea party when it’s exactly what they criticize the Republican elite for: choosing to compromise, which results in problems never being resolved. It is also for this reason that they are demanding that spending cuts come into force now, and are not spread out over 10 years.

Many of those at the heart of the tea party do not believe in the catastrophic scenarios coming from all sides if it were the case that the debt ceiling was not raised. Others say that they don’t care whether they are re-elected. We are not talking about career politicians. They are elected politicians on a mission who will act of their own will, like kamikazes, on matters concerning the debt. How does one negotiate with kamikazes?

One question remains: How many elected representatives linked to the tea party will prove to be hardliners, will oppose John Boehner until the very end and will favor economic chaos over a political compromise? We will find out next Tuesday, but until then, the Republicans are raising the stakes by closing the door on any compromise.

What if….?

For every dollar spent by the U.S. federal government, $40 are borrowed. If the country can no longer borrow on Aug. 3, what will happen? The government will prioritize payment of interest on the debt after which there will only be enough money to pay half of the expenses to which it is ordinarily tied. So who would the government prioritize among war veterans, people with disabilities, recipients of welfare and health programs or soldiers? That’s the kind of impossible dilemma which Obama would be faced with.

If the debt ceiling is raised by Aug. 2 but the debt reduction plan which accompanies it does not satisfy the credit rating agencies, the United States could see its credit rating fall. If this happened, interest rates would increase, meaning that government borrowing, bank loans, mortgages, car loans and student loans would be more expensive, among other things. The whole population would pay the price. Creditors to the United States, China at the forefront, would become more and more anxious and demanding. Entrepreneurs would limit their investments and the number of staff they hire, thus hitting job creation even harder. In short, another recession would be on the horizon.

It would be surprising if the current situation reached the point where the country defaults on payment. The stakes are too high, and John Boehner is aware of that. It would also be just as surprising to see the leaders in the Congress and the White House reach an agreement on a major debt reduction plan by Tuesday. This scenario comes with its dangers, for the United States and for the economy, ours included.