Big Trouble – and Money

Ever since it took weeks of hard negotiations between the two parties in the USA to decide, just some hours before a legal deadline, to agree on a new, higher level of government borrowing and debt, there is serious trouble in the international economy. This is not to go into all the – controversial – details, but to focus on some crucial aspects of the crisis – and to consider its roots.

Some of the basic facts: the House and Senate of the USA raised the upper limit for government borrowings up to US$2.4 trillion. But it was only 10 hours before the government would not have been able to pay salaries etc. when the US president was able to sign these regulations into law.

It was a solution where both parties had to give up some of their principled goals: the Democrats wanted to end some tax cuts for the wealthy and increase tax revenue, but the Republicans rejected any tax increases – so the planned future savings will have to come from reduced spending – also affecting the fields of social services for the poorer sections of society.

The solution found did avoid an imminent disaster: that the US government would not have been able to pay its bills starting on 2 August 2011.

But some comments are sharply negative evaluating the long term consequences, like To Escape Chaos, a Terrible Deal, or another one in the New York Times, saying The President Surrenders:

For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status…

And then there are the reported terms of the deal, which amount to an abject surrender on the part of the president. First, there will be big spending cuts, with no increase in revenue. Then a panel will make recommendations for further deficit reduction — and if these recommendations aren’t accepted, there will be more spending cuts…

But the G.O.P. [the “Grand Old Party” = the Republican Paty of the USA] has just demonstrated its willingness to risk financial collapse unless it gets everything its most extreme members want.

In fact, Republicans will surely be emboldened by the way Mr. Obama keeps folding in the face of their threats. He surrendered last December, extending all the Bush tax cuts; he surrendered in the spring when they threatened to shut down the government; and he has now surrendered on a grand scale to raw extortion over the debt ceiling…

In the long run, however, Democrats won’t be the only losers. What Republicans have just gotten away with calls our whole system of government into question. After all, how can American democracy work if whichever party is most prepared to be ruthless, to threaten the nation’s economic security, gets to dictate policy? And the answer is, maybe it can’t.

So much for such a personal political comment – in one of the most important newspapers of the USA.

But the economy is also reacting negatively.

The US based credit rating company Moody reacted to the bill by placing the US government’s credit worthiness “under a negative outlook.” This was followed by the announcement that “Standard and Poor’s took the unprecedented step of removing the United States government from its list of risk-free borrowers.”

Not only international stock markets went on a downward trend. The Chinese government news agency Xinhua sharply criticized the USA for being “addicted to debt:”

China Lectures US Over Debt Crisis

“The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered,” after the rating downgrade.”

Why such a reaction from China? “As of May 2011 the largest single holder of US government debt was China, with 26% of all foreign-held US Treasury securities.” If the US currency goes down the drain, those who trusted the economic stability of the USA will share the losses. And the Chinese criticism becomes understandable when one looks at the history of the debts of the USA.

US debt history

US debt history (mouse-click on picture to enlarge)

President Obama acknowledged that the loss of confidence in the US governments credit worthiness is because economists and others “doubted our political system’s ability to act,” including modification of tax legislation as well as expense cuts.

In spite of the obvious need for radical change to reduce the debt accumulated from the past, the Republican Party is determined to reject any form of increased revenue generation by raising taxes. In more specific terms this relates to the extension of tax cuts enacted in 2003 by the administration of President George W. Bush, which – unless congress passed legislation making the tax cuts permanent – were set to expire in 2011.

450 US conomists, including ten of the twenty-four American Nobel Prize laureates alive at the time, had opposed these Bush tax cuts in a public statement:

Passing these tax cuts will worsen the long-term budget outlook, adding to the nation’s projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.

Since 2001, the Bush administration had initiated tax cuts for all taxpayers, but the details of the policy were criticized as too generous to the rich, benefitting the wealthy, leading to a sharp rise of inequality, someting that is without parallel among economically developed countries. Following the 2003 tax cuts, the share of income going to the top 1% of society – ONE percent! – rose to 14.0% in 2004.

Equal democratic rights and economic balance are obviously not the same. And the present financial arrangements do not seem to touch this unequal sharing of burdens for the benefit of the whole society. The agenda for further rounds of negotiations for the president is set.

What is interesting in this positionong is the fact that a considerable section of the adherents to the Republican Party self-identify themselves as members of Christian communities. But they seem to be oblivious of how Jesus spoke about property and sharing, about the rich and the poor:

  • Take care to protect yourself against every desire for having more, for life does not lie in the abundance of things one owns.
  • No servant can obey two lords. Either he will hate the one and love the other, or pamper the one an scant the other. You cannot serve both God and Greed.
  • When the Pharisees heard what he was saying, they belittled him, as they were attached to riches.
  • Happy you who are poor, for heaven’s reign is yours. But dire your plight, you who are rich, for your time of comfort is over.
"In God We Trust"

"In God We Trust"

In God we trust? – Then, maybe, this should not be printed on money.

In the next post, I will present and compare some taxation schemes from different countries – also a glimpse on the fact that Cambodia has recently, finally, started to collect taxes from wealthy landowners in the city of Phnom Penh, where the price of land has risen to US$3,000 per square meter in some places – while at others, thousands of people are still threatened with eviction from where they used to live for years.

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  1. Remmy Nweke says:

    Very interesting to read, definitely would be back. Keep it up sir.

  2. Anonymous says:

    Thanks, Remmy Nweke – thanks for coming again – share it with friends if you find it interesting.Norbert

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