America's economic woes are far from over

When, early in 2014, the dispute flares up again, it is far from certain a proper settlement will be any closer than it was this month. 

After 16 increasingly frantic days that tried the faith of the financial markets in the United States’ institutional soundness, the US Congress has finally agreed on a deal that would postpone a showdown on federal government spending and borrowing for a while.

The Senate and then the House of Representatives have voted to extend funding of the US government till the middle of January 2014, and to extend the limit on US debt till February 7, 2014.

The essential demand of many Republicans in Congress, that the landmark healthcare proposal initiated by the Democratic administration of Barack Obama be defunded or postponed, was not met, leading to many seeing this as an unequivocal victory for the White House.

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But it has come at a high price. While, in the end, the markets’ refusal to price in a default by the US government has been justified, the systemic vulnerability in Washington, DC, has been clearly exposed.

The federal government has been shut down since the beginning of this month while Republican and Democratic legislators played at brinkmanship.

The date by which the debt ceiling had to be raised loomed ever closer – bringing with it the possibility of a catastrophic US default and the freezing of financial markets – but that apparently impacted the decision making of Republican objectors only minimally.

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Eventually, the more moderate Republican leadership – especially House Speaker John Boehner, who owes his position to the radical Tea Party – defied their more extremist Congressmen and decided to accept a bipartisan compromise.

What is worrying about this is that it does not seem to be a permanent solution to this conflict over US government spending.

On the contrary, it allows for a greater show of strength by the anti-spending wing of the Republican party in the months to come, possibly intimidating those in the party’s leadership who eventually gave in on this occasion. 

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When, early in 2014, the dispute flares up again, it is far from certain a proper settlement will be any closer than it was this month. Eventually, the constant uncertainty will begin to tell on the risk appetite of global investors.

The geo-strategic impact of Washington’s paralysis should not be ignored, either; calls for a “de-Americanisation” of the world economy from the state-controlled media of the People’s Republic of China have grown ever louder over the course of the US shutdown.

Of course, China is the biggest holder of US debt, so it seems difficult to see how it would be in its interest to enforce this “de-Americanisation”.

Indian observers, accustomed since 2009 to divisiveness and legislative paralysis, will readily understand the economic risks of ignoring structural problems in the policy-making apparatus.

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Each time such rifts are papered over without any attempt at a more permanent solution, it only stores up greater trouble for the next time.

More generally, the flow of funds back to a United States that is rediscovering growth will eventually have to take into account the changing risk profile that this perpetual battle over spending implies.

If so, then there may at least be a small silver lining for an India that is over-dependent on foreign funds.