The epic television situational comedy that would best portray the frothy and frivolous 1990s, was the eponymous television show Seinfeld. It famously marketed itself as "the show about nothing". Nothingness was a topic the show explored with great energy. Yet, the show displayed faith in one unassailable belief — that life will take its own natural course, irrespective of the machinations of any and many. People have fundamental traits that rarely change.
The debate in the United States Congress over the past fortnight over the debt ceiling reeks, alas, of a similar axiomatic truth. Only, this time in politics. A truth that political parties can rarely escape relates to their ideological DNA or the circumstances of their emergence. The reactionary intransigence of the Tea Party, the conservative status quo instincts of mainstream Republicans and Democrats, and the increasingly shrill Left-inclined Democrats who emerged this past fortnight have demonstrated this truth adequately.
Perhaps, this state of affairs is nothing new in the long history of this sprawling republic — after all, it is during the US Civil War in the 1860s that the great pessimist and cynic Ambrose Bierce defined politics as: "A strife of interests masquerading as a contest of principles. The conduct of public affairs for private advantage."
What's in the balance
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What has changed now, however, is the active stake the world has in the United States and how its political dysfunction affects the rest of the world, particularly in Asia. While political leaders from China and Russia onwards have decried brinksmanship in American politics — the global investor seems to have opportunistically begged to differ. Investors into the US Treasury markets in July (while risks of default rose) made nearly $183,000 per $10,000,000 invested. The result of this increased demand has been a decline in the 10-year yield to around 1.83 per cent.
So, in the grand tussle between Democrats and Republicans, between deficit hawks and social democrats, between conservatives and liberals — it is the fixed-income markets that have made a killing. The global capital didn't invest into the equity markets. They didn't bet that the debt ceiling would improve the American economy. Rather, they expediently capitalised on two truths: that the Americans would pass the debt ceiling again (the 79th time since 1960) but also that the economic health of the US would be get worse!
Only 48 hours after the debt ceiling debate has subsided — while writing this — the equity markets (which are a useful proxy for the health of an economy) have already tanked.
The Dow Jones Index fell over 2.2 per cent and the S&P fell by over 2.6 per cent. Ostensibly, weak economic news (decreased consumer spending) coupled with a debt deal that promises spending cuts (at a time when aggregate demand is weak) are the reasons for this equity market decline. No doubt, there is a certain amount of ex-post rationalisation by the pundits who observe the markets. Yet, what seems evident is that the debt ceiling deal seems to have sapped any possibility of recovery at least in so far as government spending is concerned.
There are two critical financial aspects to the deal that has been signed. The first, is a $900 billion (Dh3.30 trillion) savings over 10 years by capping discretionary spending including a $350 billion cut in defence. The second is a $1.5 trillion reduction in the American deficit via what both parties ostensibly want: reforming entitlement programmes and "revenue-raising tax reforms". Further more, a pressure mechanism has been put in place, wherein failing to arrive at a compromise on how to achieve reduction — a trigger will apply spending cuts across the board for Medicare payments, defence, infrastructure among others.
While it is too early to say, there is increased evidence of deflationary pressures. Reports released by the Commerce Department — prices and private wages declined. Coupled with weak employment all eyes are back on the Federal Reserve. If it fails to do anything, virulent critique is unavoidable. If it does indulge in a third phase of Quantitative Easing, we will see some rallies in the equity market but further confirmation that the US financial system is stuck.