The United States Debt: The Resurgence of Radicals

I should confess that the matter of the agreement to overcome the problem of the United States debt ceiling is bittersweet to me. I clarify this by saying that it is far more bitter than sweet.

I will start with the sweet, which has little that is rational. For decades, the citizens of the United States have lived beyond their means. They have done this, in the first place, due to the strategic role of the dollar in global financial engineering, which causes the rest of the countries to have enormous reserves of that currency (this means, in other words, the system moves the entire world to lend cheaply to the United States).

This situation, the seniority of the dollar, resulted from the accords that came immediately post war; it was a prize to the role of the United States in the defense of the democracies and also a mechanism for the necessary reconstruction of the European economies devastated by conflict.

In the last 40 years, when the dollar ceased to have a gold equivalent, the logic of the system led to a perverse asymmetry. All nations that broke with the basic precept of adjusting their spending to their income struggled to manage their debt and had to make adjustments to recuperate their credit. All countries with the exception of one: The United States, which only issued more debt, which the rest financed in an automatic manner (or almost).

Now this has stopped. The United States finds itself obliged to make severe fiscal adjustments. Finally, the spoiled rich kid is forced to do his homework. This could be a prelude to more equitable world financial order. That is the end of the sweet, now comes the bitter.

Normally all adjustments, and more, if negotiated among representatives of different parties, is a combination of an increase of taxes and tariffs (more income) and reduction of spending (less expenditure). In the case of the United States, it will be almost exclusively the latter.

The foreseeable effect will be a prolonged economic depression, because it utilizes the iatrogenic scheme (illnesses caused by the doctor) which was used in other countries at the end of the past century, and which produced greater social inequality, structural growth problems, and institutional weakness to cope with economic shocks.

There is no space, in this accord, for medium term recuperation. And, as Krugman says, it is absurd to let the “confidence fairy” (of investors and consumers) to solve everything. This is not how the real economy functions.

A United States economy which grows little and poorly is bad news for Mexico, whose economic dynamism is increasingly subject to the behavior of external demand, above all that of the United States.

It is bad news if we take into account that the government today does very little to stimulate internal demand. This is stated by Coparmex (Mexican employers association), worried by the deceleration.

The Political Effects Are Not Minor, Either

In the past few days, the option that the United States had in view was very negative for democracy, from the point of view that can be seen: Would Congressional deadlock lead to technical bankruptcy, or would there be a unilateral increase of the debt ceiling via a presidential decree? The clash between Congress and Obama was taken to extremes.

In other words, the crisis was not only the debt, but also the function of democracy within a divided government (the Executive on one side, the Legislative on the other).

Perhaps the debt crisis has been apparently resolved (it will return, but with another key). What remains unresolved was the crisis of the democracy. For one reason: Obama capitulated before the Republicans, and the moderates of this party capitulated before the extremists. It was not even a triumph of the Legislative. It was a triumph of a minority capable of imposing conditions.

And this is the crux of the matter. The Republican Party demonstrated its will to push the most powerful nation to the edge of financial collapse, and to pull it back only if it fulfilled the wishes of its most extreme members.

There were no income tax increases, so that the rich would pay a part of the adjustment and to avoid affecting the basic social expenditure. The Democrats bowed in order to avoid bankruptcy.

The extortion worked and furthermore, those who carried it out did not have to pay major political costs. To those who fell, their followers on Twitter went to Obama. The democracy functioned in favor of those who were politically ruthless (who knows why, but it reminds me of Lenin, who accepted that the Bolsheviks were a minority, but what differentiated them from the other parties in the Duma was their ruthless use of power).

These political effects that we see in the United States, the victory of intransigence over the interest of the community, are not exclusive to that country. We see them, repeated with disturbing regularity, in various other nations. There is a problem in decision making, where each time there is less space for mediation.

This problem, I am afraid, is linked to the growing perception that a radical attitude does not have political costs, but it does have benefits. It is an attitude that thrives on anger and the desperation of the citizens; in other words, thrives on the difficulties of democracies in order to be socially effective.

Perhaps we are coming to a resurgence of radicalism of all colors. And it is the beginning; we are just seeing the tip of the iceberg.