Defaulting on American Power
The debt default showdown in the U.S. is reaching new heights as the latest negotiating session yesterday evening ended in heightened tension. Meanwhile Federal Reserve Chairman Ben Bernanke warned yesterday of a “huge financial calamity” if the debt ceiling is not increased. And the Moody’s rating agency’s threat of a credit downgrade highlights the real consequences of failing to pay America’s bills. This is not only an economic issue. Republicans and Democrats, Bernanke, and America’s credit rating agencies have all warned about the dire consequences of defaulting on our nation’s debt. America’s power and role in the world is based off of its economic strength. Further, these dangerous games hardly serve as a good advertisement for the American model of democracy and effective governance as many countries around the world reconsider their models. We should not be playing games with American power.
Economic strength is the foundation of American power. Leslie Gelb, president emeritus of the Council on Foreign Relations, explains, “[A] strong economy is the basis of both a vibrant democracy at home and U.S. military might abroad.” Similarly, Rudy deLeon, vice president of the Center for American Progress and former deputy defense secretary tells NSN that, “Ultimately the economic relationship builds the security relationship.” Harvard’s Joe Nye, former chairman of the National Intelligence Council, explains, “Economic resources can produce soft-power behavior as well as hard military power. A successful economic model not only finances the military resources needed for the exercise of hard power, but it can also attract others to emulate its example.”
Nina Hachigian, senior fellow at the Center for American Progress, explains how the debate hinders American power: “The entire global financial system depends in large measure on faith that the U.S. government can and always will repay its debts. Any suggestion that it cannot can roil the markets.” She explains, “[I]t is not wise to toy with a significant source of American power. America enjoys the unique privilege of having its currency act as the world’s reserve. Every political circus act on the debt gives ammunition to those (often from emerging powers like China and Brazil) who are calling for the world to become less reliant on the dollar, and eventually to replace it with another reserve currency. While there is, at present, no attractive alternative, and some economists think a switch to another currency would be a net positive for the U.S. as it would force us to live within our means, such a move would take away advantages Americans have long grown accustomed to, and the transition would likely be very, very painful. And, more immediately, some analysts predict that a failure to increase the debt ceiling could send the U.S. back into a recession.” [Les Gelb, 11/10. Rudy deLeon via NSN, 7/13/11. Nina Hachigian, 6/1/11. Joe Nye, 6/1/11]
Debt brinksmanship empowers authoritarians and state capitalists; lawmakers need to remember the world is watching. As developing and established powers compare governance systems around the world, debt ceiling gridlock hurts the standing of America and democratic systems more generally. As Council on Foreign Relations Senior Fellow for International Economics Sebastian Mallaby writes, “The fact that gridlock in Washington renders such prognostications [of financial pandemonium] necessary is itself damaging. Since the financial crisis, authoritarians and state capitalists have lost their respect for the United States. Market capitalism is in disrepute; democracy is discredited. The budget fight is only deepening such feelings. Democrats and Republicans should remember that the world is watching.” The Economist underlines the need for lawmakers to engage in good-faith efforts to make democratic government work: “We’re not in an era when fascism is on the march, but we are in an era when democracy is not generally showing its best governing face… the fact that autocracies sometimes enjoy real advantages in policymaking should remind us of the need to behave responsibly in democratic activity and to make sure that our representative institutions are actually capable of governing, and are not paralysed by political brinksmanship.” [Sebastian Mallaby, 7/1/11. The Economist, 7/11/11]
In addition to damaging American economic power, default would undermine faith in America. Nye earlier this month said that defaulting on American debt would be the biggest unforced economic blunder ever. “Somebody said at the opening session of the [Aspen] Ideas Festival a couple of days ago, if that [default] occurs, if we undermine the credibility of the U.S. Treasury to meet its debts, it will be the greatest unforced error in economic history.” Undersecretary of State for Economic, Business and Agricultural Affairs Robert Hormats adds, “I think it is unimaginable to me that anyone would want to put the creditworthiness of the United States in doubt, much less take these kinds of actions. And it would be harmful from a financial point-of-view; it’d be harmful from a foreign-policy point-of-view and harmful from a national security point-of-view because it would undermine faith in the United States around the world.” [Joseph Nye via Reuters, 7/6/11. Robert Hormats via Reuters, 7/6/11]
What We’re Reading
A suicide bomber has killed four people at a memorial service in Kandahar for the assassinated half-brother of Afghan President Hamid Karzai.
Forensic teams said they had no suspects in the attacks that killed 18 people and injured 131 in Mumbai, India.
The government of Iraqi Prime Minister Nuri Kamal al-Maliki is privately telling American officials that it wants their army to stay in the country after this year’s withdrawal deadline.
Military forces loyal to Col. Muammar el-Qaddafi counterattacked and briefly recaptured a front-line town from opposition forces, but they were beaten back by a large rebel force late in the day.
In a purge aimed at appeasing antigovernment protesters, Egyptian authorities fired 669 police officials linked to the regime of former President Hosni Mubarak, even as parliamentary elections are delayed.
The U.S. has expressed concern over a crackdown in Malaysia on protests for electoral reforms.
The Italian senate is set to vote on a tough austerity budget to reduce one of the largest budget deficits in the eurozone and avoid any need for a bail-out.
Rupert Murdoch has capitulated to parliament and abandoned News Corporation’s bid for BSkyB, as he faced the prospect of appearing in front of a judicial public inquiry.
Militants in Nigeria’s southern oil delta issued a new threat to resume hostilities as authorities battle a wave of bomb attacks blamed on Islamists in the north of the country.
The economies of Latin America will likely expand more quickly than previously expected in 2011, but are vulnerable to capital flows that may generate price bubbles, a United Nations economic body said.
Commentary of the Day
Joseph Cirincione argues that Congress needs to reevaluate U.S. spending on nuclear weapons and decide whether to reduce arsenals in order to save funds or to increase funds in order to maintain the current force indefinitely.
Karim Sadjadpour writes that the quarrel between Ahmadinejad and Khamenei is a positive development for Washington, which should use this opportunity to tear down the information and communication barriers the regime has erected.
Jason Overdorf contends that the three consecutive bombings in Mumbai are likely to harden India’s stance toward Pakistan in the country’s upcoming “strategic dialogue” with U.S. Secretary of State Hillary Clinton.