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Debt contagion

By Peter Coates - posted Thursday, 17 October 2013


By Friday (Australian time) unless US political compromises fortunately make this article redundant, the US Debt Crisis may go viral. This self-inflicted financial virus concerns the squandering of America’s reputation as the main haven for prime investments, including many Australian investments. The sub-prime Global Financial Crisis (GFC) from 2008 was unintentional while this onrushing Debt Crisis is an intentional act by the kind of Americans the world is learning to hate.

Self-absorbed tea party right-wingers within Republican ranks, with little knowledge or care about genuine international responsibility, are looking out for No.1. The tea party movement is a loose group of generally right-wing extremists who believe in guns, small Government, less many for the poor, lower taxes for the rich and isolationism – except for aggressive ventures abroad to make countries like Iraq and Afghanistan safe for western values, American-style.

This Debt Crisis could impact Australia’s economy in ugly and disturbing ways such as rapidly increasing or lowering the value of our dollar – which could upset Australian exports – or hurting Australians in ways like the GFC. The US is suffering from a hung US Congress in terms of having a Republican majority in the US House of Representative. The House has been rejecting routine measures to raise the US debt ceiling with the specific aim of blocking Obama’s humanitarian health care programs. In Australia such political tactics would bring on a double dissolution election.

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Even if compromise is reached on Friday (Australian time) or later this month the US Debt issue could recur every month until US November 2014 mid-term elections when all members of the US House of Representatives are up for re-elction as are a third of US Senators. If the Republicans gain more seats in November 2014 the situation might be worse with Republican majorities in the House and Senate. This would leave Democrat President Obama bowing to a Republican agenda from November 2014 to November 2016.

Alan Kohler, ABC Australia’s business editor said last night(October 16, 2013) :

If US president Barack Obama is not allowed to borrow any more, then spending would have to instantly be cut to match income. Over the next three months that would mean a cut of something between $US50 billion and $US100 billion per month. Instant recession would result. So would the leader of the free world pick up the phone to his biggest creditor, which is Mr Xi Jinping of China, and say "Er, listen, Jinping - we just can't make the interest payments for a month or two. We're good for it, trust me! We just need more time." Or rather than throw himself on the mercy of China, would he tell American's pensioners that they cannot eat for a while because China has to be paid first?

Or would he keep paying pensioners and just default on the debt, blaming the ensuing chaos on the Republicans? And would there be chaos? Well the GFC in 2008 was caused by a collapse of trust between banks - they stopped lending to each other. The collapse of trust in the US government's creditworthiness would be uncharted territory. When Standard & Poor's downgraded US debt in August 2011, the market price of that debt actually went up, not down, and the stock market soared. But that was just one rating agency. All three, downgrading by a lot because of default, would be a different matter. Global chaos and financial collapse? I don't know, but it wouldn't be good.

The US Debt is actually mild by international standards in terms of US debt as a percentage of US GDP. On December 31, 2012 figures the latest figures US debt was 106%.The US fared better than some other major countries - with German debt at 142% of German GDP, France 182% and the UK 406%. Australia at 95% had a similar debt percentage to the US. Australia actually had a slightly higher debt per capita than the US.

The Obama Administration was legitimately voted in by the electorate in 2012. US debt levels have increased under US Democrat and Republican Administrations for many years. Obama having to inherit the largely Republican caused Global Financial Crisis and George W. Bush’s two wars have continued to render Obama a lame-duck President. Extremist tea party elements in Congress are intentionally sticking the knife into Obama and his Democrat Party. Their ultimate aim is to so discredit the Democrat centrists to improve the odds of a right-wing Republican President succeeding Obama in 2016.

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The US for most of its history has been running more or less efficiently on a reasonable Democrat-Republican divide. It’s the politically fundamentalist tea party faction that are destabilising the US Government, the US economy and unfortunately the world economy, including Australia. Many Americans are apologetic about this situation but that won’t stop another GFC. If American leaders want to be respected they have to prove it. American arrogance should not be excused just because America is the top dog currently.

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About the Author

Peter Coates has been writing articles on military, security and international relations issues since 2006. In 2014 he completed a Master’s Degree in International Relations, with a high distinction average. His website is Submarine Matters.

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