There is a lot of panic regarding the U.S’s debt ceiling, which has existed since 1917. But why? In a country that relies on debt, consumption and cheap and easy access to credit, why is it so concerned about setting a limit on its debt?
After all, without China buying considerable amounts of U.S debt, the U.S wouldn’t have the flexibility it does in order to finance its excessive spending on defence and also its low taxes for the rich, for instance. China buys lots of U.S debt to reinvest its amass of dollar reserves into Treasury securities, with these reserves relating to China’s attempts to keep its own currency low through purchasing US dollars so it has competitive exports, the trade imbalance with the US’s high consumption of products from China, hot money speculation regarding China’s currency appreciating and dollar FDI (see here for more).
However, whilst China couldn’t offload all its U.S dollars immediately, it could do it through a slow process, which is starting to happen with it moving towards import based policies in order to deal with the increasing regional tensions and inequalities existent within China. But for the time being, China relies heavily on the U.S’s debt and also American consumers to purchase lots of China made products to maintain a trade imbalance.
Therefore, this idea that the U.S can have a limit on debt, when currently its own hegemony requires creditor countries to keep buying that debt, seems rather nonsensical. However, what the debt ceiling does provide is a bargaining tool for the Republicans, especially, to demand cuts to food stamps, Obamacare and other socially orientated policies on the basis of there being “no money left”.
It also relates to the clever PR ignorance towards the problem of private debt, with profit orientated financial practices requiring the creation of ongoing unsustainable asset bubbles that create cheap credit, where people spend. To then call for cuts to public spending because of there being too much debt ignores the fundamental need for that debt in the U.S to keep their economy going.
This inconsistency is even clearer when considering the Republican’s refusal to increase taxes, with the Democrats even discussing cuts to oil subsidies. Tax increases would be sensible; they are required alongside a radical reduction of U.S defence spending and also decreased reliance on oil – and essentially petrodollars – for the economy to become more sustainable. The U.S, without any restructuring to its political economy and also ideological orientation, is heading for a shock.
The current arrangements will not sustain; attacking the public sector is only making the crisis worse given the reduction in consumption power and ability to create debt, as asset bubbles become harder to make, and more restrictions are placed on borrowing debt after the problems created through sub-prime mortgages, for instance.
This relates back to 1971, too, when Nixon removed the direct convertibility between gold and the dollar, helping create a boom of free markets and removed the need to back the dollar with anything tangible. This related to the rise of finance, the expansion of the U.S’s hegemony but also saw the U.S becoming a debtor nation, increasingly reliant on the countries to buy its debt in order to finance its excessive debt and deficit.
Essentially, the U.S is a debtor country. It has to change the fundamental workings of its political, social and economic relations before anyone could take the talks around the debt ceiling as anything more than political grandstanding intended to push through ideological neoliberal cuts and policies.