Opinion
The world needn’t suffer due to US brinkmanship
Summary
It is a relief that America’s debt ceiling impasse seems broken, but there is no reason for the world to be pushed to the edge, and perhaps it is time to think of ways of mitigating its risksThe great game theorist Thomas Schelling wrote during the Cold War years about how it was sometimes rational to behave irrationally. More than five decades later, the US Republican Party seems to have played the brinkmanship game to its advantage. It has pushed the US government dangerously close to a default. President Joe Biden has now signed off on a spending freeze in many areas in exchange for a tentative deal to increase the US debt limit for two years. The crisis does not end till US lawmakers formally back the deal struck over the weekend. Both the debt ceiling as well as outstanding US public debt are at $31.4 trillion right now. This means the US government will not be able to borrow any more money unless the legal debt ceiling is increased in the next few days. The risk of a US debt default has cast a long shadow over financial markets around the world, though investors are breathing a bit easier now. This is not a new situation. US lawmakers have increased the debt limit 78 times since 1960. The problem is that such bipartisan agreements are becoming increasingly difficult to hammer out, given the divisive nature of contemporary American politics.
The US debt ceiling makes no economic sense at all. Many countries have fiscal laws that allow parliaments to restrict borrowing by the government. India also has one. All these fiscal laws define budgetary targets in terms of the underlying gross domestic product. They also have escape clauses to deal with exceptional situations such as wars or pandemics. The US has an absolute borrowing limit that, in effect, ties its fiscal policy to the political equilibrium rather than the economic situation, a policy design that flies in the face of economic logic. The US is the largest economy in the world. It also prints the global reserve currency. Data from the Bank of International Settlements shows that around 58% of global foreign exchange reserves are held in dollars. Central banks around the world are major investors in US government securities. The interest rates on them are among the key benchmark rates against which a lot of private sector debt is priced. Such dominance ensures that the rest of the world has good reason to look beyond the latest debt agreement and ask hard questions about the global economic order, especially since there are few signs of political polarization easing in that country.
This may be a good time to revisit an idea floated by John Maynard Keynes in 1944, when the major powers were redesigning the global financial system so as to avoid the mistakes that led to World War 2. Keynes called for a global currency that would be printed by a global central bank, or what has now become the International Monetary Fund. This currency would serve as a medium of exchange and a store of value. Keynes lost out, and the dollar became the pivot of the global economy. That served the world well till recently but is now hostage to dysfunctional US politics. The US seems to have pulled back from the brink for now. However, the more the game of brinkmanship is played, the closer the battle will have to come to the edge to make the threat credible. The premium on irrationality will increase. Another American skilled at the art of brinkmanship had said in the 1950s: “The ability to get to the verge without getting into the war is the necessary art". John Foster Dulles was the secretary of state in the Dwight Eisenhower administration. The question is whether the rest of the world should suffer as US politicians practice this fragile art in the pursuit of their short-term political interests
