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Government Shutdown: Constitutional Crisis or Political Gamesmanship?

The Congress seems compelled to take this game of chicken right down to the wire.  An 11th hour agreement, even if only resulting in a temporary delay, will allow many members of Congress to discreetly wipe the egg off their faces.  Neither side can acquiesce now. After all, there’s still a whole day before disaster strikes.

I’ll leave the T.V. networks and newspapers to make the case of whether the Republicans or the Democrats bare 51% of the responsibility (or maybe 80%) for driving the country to this economic pain point.

The problem is, we’ve already thrown the proverbial “baby out with the bathwater”.  The U.S. has become the laughing stock of the world.  America has been the world’s one true economic super-power for a hundred years. Antics like risking a government default jeopardize the likelihood of maintaining that position into the distant future.

If an actual default occurs, the damage to the U.S. reputation would take a long time to repair, if it were repairable at all. The rest of the world (with few exceptions) looks to the U.S. as the fortress of economic strength and stability. The threat of default is making foreign governments question our position as that fortress to the world. An actual default might be the tipping point that leads the rest of the world away from the purveyor of “full faith and credit” to the world.

Imagine a conversation with Treasury Secretary Jack Lew if the country defaults on its debts come this Friday. “Mr. Secretary, what’s the priority for paying the bills of the country? Will it be paying interest on Treasury Bonds or paying Social Security recipients? The Chinese won’t be happy to miss an interest payment, you know. But wait, the Chinese are only the second largest owner of U.S. Treasury debt. The largest owner is the Social Security Trust fund. Can we hold-off paying U.S. service member salaries for a while”?

I haven’t heard a single person in the news say they think the U.S. will default. That’s why the stock market has virtually shrugged off the risk of default. The “smart-money” says this is all political gamesmanship. If the smart money is right, the economic damage to the U.S. will be contained but the damage to U.S. credibility has already begun.

If the country defaults and misses important payments, the short and long term results will be unthinkable. Are we a government “of the people, by the people and for the people”, or are we a government, “of the Republicans, of the Democrats, and of the Tea Party”?

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2 comments to Government Shutdown: Constitutional Crisis or Political Gamesmanship?

  • Ron – I’ve heard that the key issue is the other nation’s use of US Dollar denominated instruments as international exchange, purchase of oil for example. I’ve also heard that the US economy and the US dollar are still the largest and most stable(?) in the world. What metric(s) should we be watching to know if the ‘tipping point’ you’ve mentioned has been reached? I don’t trust the media nor the government to faithfully report such a tipping point.

  • Mike,

    You’re identifying the fact that the U.S. Dollar is the “Reserve Currency” of the world. That means that other countries hold significant U.S. dollars in their currency reserves. This allows global commerce to be transacted in U.S. Dollars without the need to convert, say, a English Pound Sterling into U.S. Dollars and then use the Dollars to pay for American imports into the United Kingdom. By working across borders with a single reserve currency, interest rates around the world are kept lower due to the ease of doing business in one currency.

    Russia and China already want a change away from the Dollar as the world’s reserve currency. This shutdown and default scenario gives countries like that a louder voice because the rest of the world will start to lose confidence in the U.S.

    The British Pound Sterling was the reserve currency of the world until 1944. After the War the economic dominance of the U.S. allowed for our currency to become the reserve standard.

    The tipping point would not come for some number of years because a global economic change like replacing the world’s reserve currency would take time. That said, a U.S. government default might start the wheels in motion to make such a change. China would be all too happy to egg that argument along.

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