US Government Re-Opens but No End to Suspense

At the very last minute, America’s two political parties were surprisingly able to compromise. This conflict has made clear just how uncontrollable and unavoidable America’s political confrontations are.

Early on the morning of Oct. 17, the White House announced that President Obama had signed the bill to re-open the federal government and raise its debt ceiling. According to the law, the government’s borrowing capacity will last until Feb. 7, 2014, which will at the very least allow it to be funded until that time. It also allocated funds to cover the expenses incurred during the two weeks the government was shut down while some employees came to work anyway.

Thus a potentially worldwide financial catastrophe has been averted. From the shutdown of nonessential government services to the risk of ruining its credit rating, nearly every aspect of government has been influenced by the confrontation. However, the result has been more than just dramatic domestic politics; it has also called into question America’s strength as a world leader.

The radically conservative wing of the Republican Party has already resumed attacks on Obama’s signature health care reform bill as a bargaining chip for the 2014 budget negotiations — a continuation of the political games that have been a central component of their platform. The U.S. fiscal year starts on Oct. 1, and the Democratic and Republican Parties must immediately come up with budget arrangements, while simultaneously raising the debt ceiling even higher (as a result of the United States’ $16.7 trillion debt). This has turned the threat of government shutdown and default on the national debt into terms of negotiation for the radical Republicans. At the height of the government shutdown, negotiations between the two parties practically became a game of “who will be first to blink.” Despite this, few people actually believed that the real risk of a catastrophic debt default was very high, thinking that the consequences would be so dire for the domestic as well as world economy that the two parties wouldn’t allow it to happen. However short-lived the possibility of default was, it still shook the supremacy of the U.S. dollar as the world’s reserve currency.

It’s plain to see, then, that while the federal government may shut down again, a default on national debt won’t happen. These are the rules of the game the two parties are playing right now. From this perspective, their behavior — wherein they wait until the last minute to raise the debt ceiling and re-open the government — is logical. These rules will continue to determine the political game that is played over governing America and determining what is possible in U.S. politics.

However, America’s partisan games are causing a climate of increased risk in the economy, which impacts other countries’ economies. China is the primary creditor of the U.S. If America is unable to resolve its partisan struggle and defaults on its debt, the value of the American dollar will fall, causing the value of its debt to China to decrease. Because the current agreement between the two parties will last only until Feb. 7, 2014, the possibility of America defaulting on its debts has only been deferred until then and has not in fact been settled, leaving China’s foreign currency reserves at risk along with America’s credit rating.

China must not passively allow the value of its foreign assets to fluctuate unmanaged. This bout of confrontational American politics raises an old problem: how best to allocate China’s foreign reserves. This leaves China as the foreign spectator watching America’s political games most fervently.