The Manufactured Crisis

Republicans in the United States are blocking a new national debt limit for ideological reasons. They intend to stick to their delusional tax policy no matter what happens.

The United States may be the birthplace of poker, but what Republicans and Democrats are doing in the name of financing the nation’s debt would be hard to match anywhere in a country already accustomed to high-stakes gambling. Over this past weekend, President Obama and Republican Speaker of the House John Boehner were again unable to agree on conditions that would allow the current debt limit of $14.3 trillion (more than €10 trillion) to be raised.

The Republicans have made a program of radical cuts in services a condition for their agreement to what has always been a matter of routine government business. Without their support in the House, the country is faced with bankruptcy. That’s been the case since mid-May. U.S. government liquidity exists only because they have, for example, stopped putting money into the fund from which government employee pensions are paid, as well as moving funds from one account to another with bookkeeping tricks.

But on Aug. 2, that game will be maxed out. If you include the time necessary to pass the legislation, only 10 days remain to find a compromise. If this does not happen, America’s creditors will still be paid because principal and interest on Treasury debt are paid from current revenue. But other payments, such as Social Security checks and military pay, could be partially or even completely halted. Interest rates on U.S. Treasury bonds would skyrocket, and America’s credit rating — flawless until now — would be jeopardized.

In reality, the U.S. debt dilemma is absurd. Even when the federal debt, the combined debt of all 50 states and all municipal debt is added together, the IMF says that the United States, with a debt equal to 100 percent of its GDP, is still in far better shape than countries like Greece or Italy, with debt in excess of 140 percent and 120 percent of GDP, respectively. One indication of the confidence in America’s ability to pay its debts is the fact that Treasury bond interest rates are around the 3 percent level, a historical low.

This is a crisis staged purely for political reasons, instigated by the Republicans and egged on by the right-wing populist tea party movement. The greatest hurdle for a rescue package is their radical rejection of any sort of tax increase. They argue any tax hike would spell doom for a still-shaky economic recovery. Democrats, on the other hand, castigate the class warfare tactics of an austerity measure that would put the burden on the socially needy and the middle class while protecting the super-wealthy. The rich got the greatest benefit of George W. Bush’s tax policies, and they should now accordingly return to paying their fair share.

Obama Is the Better Poker Player

In the end, Obama appears to be the superior poker player. While no amount of spending cuts was ever enough for the Republicans, John Boehner always demanded more. During the latest round of negotiations, he said that instead of $4 trillion in spending cuts, maybe half that amount would be enough. It has become obvious to the leading Republican that the promised “big deal” wouldn’t be possible without raising revenues. The New York Times reported that Boehner’s “lofty ambitions quickly crashed into the political reality of a divided, highly partisan Congress.” But if the number one Republican signed anything that raised taxes even slightly, he would not survive politically.

Under pressure from a Republican base that has slipped ever more to the right, there is no lack of presidential candidates who say they would rather see the nation go temporarily bankrupt than to break their sacred oath of “no new taxes.” Obama, on the other hand, has his Democratic troops so firmly in hand that he is able to take on the role of economizer-in-chief. He offered to make painful cuts in social programs, but only in return for Republican agreement to raise taxes on the rich.

So the Republicans are faced with three uncomfortable alternatives. They can fall back to supporting a smaller deficit-reduction package that involves no revenue increases. Or they can keep their promise for a radical consolidation and break another promise, permitting Obama to at least plug tax loopholes and eliminate corporate subsidies. Alternative number three would be to do nothing on all fronts and be left holding the bag for all the turbulence in financial markets. Wall Street, at least, doesn’t believe that Republicans would risk American insolvency. After the White House weekend negotiations, it wasn’t the dollar that came under pressure, but a currency that is facing real problems: the battered euro.