Analysis on the global effects of the US debt deal

Updated On: Aug 02, 2011

US President Barack Obama has announced that he and US Congressional leaders have reached a deal to raise the government debt ceiling, meaning the US will not default on its debts.

The deal will raise the government debt ceiling while cutting spending by about US$2.4 trillion, avoiding a default but setting the stage for more debates about how Washington taxes and spends. A special committee will be charged with finding US$1.5 million in this deficit reduction.

President Obama said he had hoped for a more sweeping deal that didn’t delegate cuts to a special committee, but said that the agreement would “begin to lift the cloud of debt and uncertainty that hangs over our economy.” The US Congress has struggled for weeks to resolve differences over America’s burgeoning debt.

Report & Analysis: Leaders agree on debt deal [WSJ, 1 Aug 2011]

Analysts are now speculating on the implications of the debt deal for the global economy. The unique position of America in the world means that any change in its fiscal direction has rippling effects throughout the world.

Asian stocks jumped after the deal was announced, in a “classic risk-on move,” according to Sue Trinh, strategist at RBC Capital Markets. The dollar also rallied upon news of the deal, indicating boosted confidence in the US economy.

Report & Analysis: Asian shares end higher on relief over US debt deal [WSJ, 1 Aug 2011]

Sean Theriault, associate professor of government, argues that the members of Congress were “acting exactly as they were elected to,” while an Economist editorial described the resolution as a “pragmatic compromise,” insisting that the bulk of the putative cuts in the deal will have negligible contractionary effects on the economy.

Opinion: Congress is doing exactly what it was elected to do [CNN, 30 Jul 2011]

Opinion: On the debt-ceiling deal [Economist, 1 Aug 2011]

However, others are less optimistic about the global effects of the debt deal.

For instance, cutting hundreds of billions of dollars of defense cuts could have profound effects on global security over the next decade. “The US… has provided a certain level of stability in global affairs, and no other nation (or organisation) has the capability of taking over this unique American role,” says Michael Schuman. “If the US can no longer afford such international comitments, the entire way the world handles security problems will be forced to change.”

Opinion: Will America’s budget deficit bring an end to world peace? [Time, 6 Jul 2011]

Some have criticised the wider implications of the debt crisis that has racked the nation since June, saying that it is a symptom of more endemic problems in the US.

David Rothkopf of Foreign Policy referred to the deal as a sign of “what a hopeless mess the US political system is,” and the solution to a mere “fraction of the challenge… what may well be the longest, most complex, least understood economic crisis in American history.”

Opinion: One – largely ironic – cheer for the proposed debt ceiling deal [FP, 1 Aug 2011]

The debt deal could also hasten the decline of American influence in the global economy. Over the past two months, American politicians and the US political process have appeared unreliable, incentivising countries to diversify away from US assets and undermining American dominance of the global financial system. “At a time when the world economy requires strong US leadership, the world is getting just the opposite,” says Schuman. “That’s not positive for America’s future standing in the world.”

Russian Prime Minister Vladimir Putin agrees with this negative view. On Monday, he accused the US of acting as a “parasite” on the world economy by accumulating massive debts and threatening the global financial system.

Report & Analysis: Putin says US a ‘parasite’ on world economy [AFP, 1 Aug 2011]

The debate has raised particular concerns for American lenders in Asia, especially China, who are rapidly losing confidence in America’s word to abide by a financial contract.

“For them,” say analysts at the East Asia Forum, “[the] debate is not about fiscal stability but is just another sign that America’s leadership is short-sighted, untrustworthy and declining.”

Opinion: US debt crisis: Implications for Asia [East Asia Forum, 28 Jul 2011]

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