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China, United States

Amid debt ceiling showdown, China sharply calls for a ‘de-Americanized’ world

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In case you missed it over the weekend, China’s state-run newspaper Xinhua printed an extraordinary editorial calling for a turn to a ‘de-Americanized’ world that appears to have had the support of the top leadership within the world’s most populous country:China Flag IconUSflag

As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world….

The tone only sharpens as the editoral blames the United States for torturing prisoners and killing civilians in drone attacks before fully condemning the era of ‘pax Americana‘:

Moreover, instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas…

Most recently, the cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized.

Elements of the editorial are somewhat biased — a self-serving ding against Washington for ‘instigating regional tensions amid territorial disputes’ is more reminiscent of Chinese bluster and blunder on relations with Taiwan, Hong Kong and Tibet, as well as the recent territorial dispute with Japan over the Senkaku/Diaoyu Islands.  But if, as is almost certainly the case, the editorial has the backing of top Chinese leadership, it will be the strongest call to date for a move to a ‘de-Americanized’ world.

It’s important to keep in mind that, for all the defeatist talk that China has eclipsed the United States, the US economy remains roughly twice the size of the Chinese economy:

GDP

Furthermore, for all of the talk that the United States is becoming ever-more indebted to the Chinese, it’s also important to keep in mind that of the $16.7 trillion or so in outstanding US debt issuance, around $4.7 trillion amounts to intergovernmental holdings (e.g., amounts held by the US Federal Reserve).  Another significant chunk of that debt is held by state and local pension funds, the Social Security Trust Fund.  In fact, as of July 2013, foreign governments held just $5.59 trillion of the debt, and China held just $1.277 trillion of it, while Japan held nearly as much with $1.135 trillion.  Here’s a closer look at the breakdown of the foreign holders of US debt:

foreignholders

In all the loose talk about China’s rise, it’s easy to lose track of those two items — China holds just over 7.6% of all US debt and its economy is just 52.5% the size of the US economy.

So while China isn’t today in a position to issue edicts about the de-Americanization of the world economy, its views are becoming increasingly influential, especially as it takes a greater investment role within the world from Latin America to Africa.  Its call for developing and emerging market economies to play a greater role in international financial institutions like the World Bank and the International Monetary Fund mean that the days of an always-American World Bank president and an always-European IMF managing director are numbered.

Even in the worst-case scenario in which the US Congress’s failure to lift the debt ceiling leads to another Lehman-style panic, China can’t do much immediately to bring about a de-Americanized world.  But, like Humphrey Bogart’s warning to Ingrid Bergman in Casablanca, the threat will come ‘maybe not today, maybe not tomorrow, but soon — and for the rest of your life.’

So when China makes noise about a de-Americanized world, it essentially means two things: a world where US debt is no longer perceived as the world’s safest investment and the US dollar is no longer the world’s reserve currency.  I’ll take a look at each in turn, but first, it’s worth making sure we’re all on the same page as to the basics of the debt ceiling standoff itself.

The debt ceiling crisis

US treasury secretary Jack Lew has pinpointed October 17 as the day that the United States will be truly jeopardized by its failure to raise the debt ceiling (currently at $16.7 trillion).

With about 24 hours to go until the world hits that deadline, the Republican Party, which controls a majority of the votes in the US House of Representatives, are nowhere near approving a bill that, with or without conditions, would raise the debt ceiling for even a short period of time, and the US Senate, which is controlled by the Democratic Party, will spend Wednesday taking the lead on a last-ditch effort at negotiations between Senate majority leader Harry Reid and Senate minority leader Mitch McConnell.

It’s reassuring to know that Moody’s isn’t quite as pessimistic about the October 17 deadline — in a memo from earlier this month, Moody’s experts argued that the US government could quite possibly hobble along, quite possibly until November 1, when a slew of entitlement spending means that the US government will be unlikely to meet its obligations on time.  The US government will certainly prioritize interest payments on US debt and meet its other obligations on the basis of incoming revenues.  But the clock’s ticking, and while Wall Street and global markets seem nonplussed about the shutdown and even about the October 17 debt ceiling deadline, there’s no way to know when that could change.

Market sentiment is a tricky thing to forecast — recall the speed in 2008 with which former US treasury secretary Hank Paulson went from worrying about the moral hazard of bailing out Lehman Brothers on September 14 to, less than 24 hours later, worrying about rescuing the entire financial system from a global panic.  While it seems unlikely that markets will immediately tank at midnight tonight if the US Congress fails to act on the debt ceiling, there are signs that other actors in the global economy are running out of patience.  One of the other top three credit ratings agencies, Fitch, put the United States on warning Tuesday by lowering the outlook on its ‘AAA’ credit rating from ‘stable’ to ‘negative,’ citing the brinksmanship in the US political system that’s so far failed to secure a debt ceiling hike.

For those of you who might have been living on a deserted island for the past three years, the US Congress is generally obligated to raise the total aggregate amount of US debt issued, irrespective of whether the US Congress has approved the spending levels associated with issuing such additional debt.  No other country (except Denmark) has a similar concept, which is why the debt ceiling crisis is such a foreign concept for non-Americans.

Between 1798 and 1917, the US Congress had to approve every single issuance of new debt; the onset of the ‘debt ceiling’ concept was initially a way to streamline debt issuance during World War I.  Since 1917, the US Congress raised the debt ceiling over 100 times, and 14 between 2001 and 2013.  Traditionally, in times of divided US government, though those votes have sometimes been subject to one party’s political posturing.  US president Barack Obama himself cast a vote against raising the debt ceiling in 2006 when he was just a US senator, and he issued some pious, if garden-variety, blather about ‘shifting the burden of bad choices today onto the backs of our children and grandchildren.’  Matt Yglesias at Slate called out Obama for ‘bullshitting’ back in 2006.

But only in 2011 did one party seek to wield the debt ceiling as a weapon of economic destruction — give us what we want on our policy priorities or the world economy gets it!  In 2011, just months after Obama’s party suffered devastating losses in the November 2010 midterm elections, Obama agreed to make budget cuts in exchange for a hike in the debt ceiling.  But now, fresh off reelection, Obama is arguing that he won’t negotiate over the debt ceiling — partly to discourage anyone from trying to use the debt ceiling as an instrument of political blackmail in the future.

In any event, for the best reporting in the United States on the debt ceiling crisis in terms of both politics and policy, go read Ezra Klein (and friends) at Wonkblog at The Washington Post and every word that Robert Costa at National Review reports from within the House and Senate Republican caucuses.

But it’s vitally important to the global economy because US debt — Treasury debt securities (called ‘Treasurys’) and, specifically 10-year Treasurys (called ‘T-notes’) — is generally viewed as the safest investment in the world.

Why US Treasurys are so special 

As Felix Salmon at Reuters memorably explained Tuesday, US-issued debt is the ‘risk-free vaseline which greases the entire financial system’: Continue reading Amid debt ceiling showdown, China sharply calls for a ‘de-Americanized’ world →

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How the US government shutdown looks to the rest of the world

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shutdownfrolics

The People’s Republic of China doesn’t do government shutdowns. USflag

Neither does India, the world’s largest democracy.  Neither does Russia nor Japan nor the European Union.

The crisis that the United States faces over the next month — the nearly certain federal government shutdown set to begin on Tuesday and the US government’s potential sovereign default if the US Congress fails to raise the debt ceiling — is almost completely foreign to the rest of the world.

The vocabulary of the government budget crises that have sprung from divided government during the presidential administration of Barack Obama — from ‘sequester’ to ‘fiscal cliff’ to ‘supercommittee’ — is not only new to American politics, it’s a vocabulary that exists solely to describe phenomena exclusive to American politics.  As the Republican Party seems ready to force a budgetary crisis over the landmark health care reform law that was passed by Congress in 2010 and arguably endorsed by the American electorate when they reelected Obama last November over Republican candidate Mitt Romney, the rest of world has been left scrambling to understand the crisis, mostly because the concept of a government shutdown (or a debt ceiling — more on that below) is such an alien affair.

If, for example, British prime minister David Cameron loses a vote on the United Kingdom’s budget, it’s considered the defeat of a ‘supply bill’ (i.e., one that involves government spending), and a loss of supply would precipitate his government’s resignation.  If Italian prime minister Enrico Letta loses a vote of no confidence in the Italian parliament later this week, his government would also most likely resign.  In some cases, if cooler heads prevail, their governments might form anew (such as the Portuguese government’s reformation earlier this summer following its own crisis over budget austerity).  Otherwise, the country would hold new elections, as will happen later this month in Luxembourg after the government of longtime prime minister Jean-Claude Juncker fell over a secret service scandal.

So to the extent that a government falls, in most parliamentary systems, the voters then elect a government, or a group of parties that then must form a government, and that government must pass a budget and, well, govern.  Often, in European and other parliamentary systems, the typically ceremonial head of state plays a real role in pushing parties together to stable government.  Think of the role that Italian president Giorgio Napolitano played in bringing together both Letta’s government and the prior technocratic government headed by Mario Monti.  Or perhaps the role that the Dutch monarch played in appointing an informateur and a formateur in the Dutch cabinet formation process until the Dutch parliament stripped the monarchy of that role a few years ago.

But wait! Belgium went 535 days without a government a few years ago, you say!

That’s right — but even in the middle of that standoff, when leaders of the relatively more leftist, poorer Walloon north and the relatively conservative, richer Flemish south couldn’t pull together a governing coalition, Flemish Christian Democrat Yves Leterme stayed on as prime minister to lead a caretaker government.  The Leterme government had ministers and policies and budgets, though Leterme ultimately pushed through budgets that reduced Belgium’s budget deficit.  No government workers were furloughed, as will happen starting Tuesday if congressional members don’t pass a continuing resolution to fund the US government.

To the north of the United States, Canadian prime minister Stephen Harper caused a bit of a constitutional brouhaha when he prorogued the Canadian parliament in both 2008 and 2009 on the basis of potentially political considerations.  In Canadian parliamentary procedure, prorogation is something between a temporary recess and the dissolution of parliament — it’s the end of a parliamentary session, and the prime minister can prorogue parliament with the consent of Canada’s governor-general.  Harper raised eyebrows among constitutional scholars when he hastily prorogued the parliament in December 2008 after the center-left Liberal Party and the progressive New Democratic Party formed a coalition with the separatist Bloc Québécois in what turned out to be a failed attempt to enact a vote of no confidence against Harper’s then-minority government.

The governor-general at the time, Michaëlle Jean, took two hours to grant the prorogation — in part to send a message that the governor-general need not rubber-stamp any prime ministerial requests for proroguing parliament in the future.

Harper again advised to prorogue the parliament from the end of December 2009 through February 2010, ostensibly to keep parliament in recess through the 2010 Winter Olympics in Vancouver, though critics argued he did so to avoid investigation into his government’s knowledge of abusive treatment of detainees in Afghanistan.  Again, however, proroguing parliament didn’t shutter Canadian government offices like the US government shutdown threatens to do.

Moreover, in parliamentary systems, it’s not uncommon for a government to survive a difficult vote with the support of the loyal opposition.  But in the United States, House speaker John Boehner has typically (though not always) applied the ‘majority of the majority’ rule — or the ‘Hastert’ rule, named after the Bush-era House speaker Denny Hastert.  In essence, the rule provides that Boehner will bring for a vote only legislation that’s supported by a majority of the 233 Republicans in the 435-member House of Representatives, the lower congressional house (Democrats hold just 200 seats).  So while there may be a majority within the House willing to avoid a shutdown, it can’t materialize without the support of a majority of the Republican caucus.  That means that 117 Republicans may be able to hold the House hostage, even if 116 Republicans and all 200 Democrats want to avoid a shutdown.

Realistically, that means that anything that Boehner can pass in the House is dead on arrival in the US Senate, the upper congressional house, where Democrats hold a 54-46 advantage.

There’s simply no real analog in the world of comparative politics.  Even the concept of a debt ceiling is a bit head-scratching to foreign observers — US treasury officials say that the government will face difficulties borrowing enough money to achieve the government’s obligations if it fails to lift the debt ceiling of $16.7 trillion on or before October 17.

Denmark stands virtually alone alongside the United States in having a statutory debt ceiling that requires parliamentary assent to raise the total cumulative amount of borrowing, but it hasn’t played a significant role in Danish budget politics since its enactment in 1993:

The Danish fixed nominal debt limit—legislatively outside the annual budget process—was created solely in response to an administrative reorganization among the institutions of government in Denmark and the requirements of the Danish Constitution. It was never intended to play any role in day-to-day politics.

So far, at least, raising Denmark’s debt ceiling has always been a parliamentary formality, and it was lifted from 950 billion Danish kroner to 2 trillion Danish kroner in 2010 with support from all of Denmark’s major political parties.

Contrast that to the United States, where a fight over raising the debt ceiling in summer 2011 caused a major political crisis and major economic turmoil, leading Standard & Poor’s to downgrade the US credit rating from ‘AAA’ to ‘AA+.’  The Budget Control Act, passed in early August 2011, provided that the United States would raise its debt ceiling, but institute a congressional ‘supercommittee’ to search out budget cuts.  When the supercommittee failed to identify budget savings before January 2013, it triggered $1.2 trillion in ‘sequestration’ — harsh across-the-board budget cuts to both Democratic and Republican priorities that took effect earlier this year, though they were originally designed to be so severe so that they would serve as an incentive for more targeted budget adjustments.

Despite the fact of the dual crises facing the US government in October, the yield on the 10-year Treasury note has actually declined in recent weeks, indicating that while US political turmoil may spook global investors, they still (ironically) invest in Treasury notes as a safe haven:

Screen Shot 2013-09-30 at 1.42.25 AM

Continue reading How the US government shutdown looks to the rest of the world →

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Lew to be nominated today for U.S. treasury secretary

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U.S. president Barack Obama is set to nominate his chief of staff, Jacob Lew (pictured above) as the next U.S. treasury secretary later today.USflag

Lew formerly served as the Obama budget director from 2010 to 2012 seems the likely frontrunner to succeed Geithner.

I wrote back in December that the next U.S. treasury secretary would play a greater role in setting foreign policy than the next U.S. secretary of state (U.S. senator John Kerry has been nominated for that job).

Here’s the Ezra Klein dossier on Lew.

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The next U.S. treasury secretary will be more important to world affairs than John Kerry

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Now that we’ve gotten the excitement about the nomination of U.S. senator John Kerry out of the way, we’re still a long way off from knowing who will succeed Timothy Geithner as U.S. president Barack Obama’s treasury secretary.

USflag

Although in terms of protocol, Kerry will undoubtedly remain the top American diplomat, the next U.S. treasury secretary will be just as important — if not more important — than the incoming U.S. secretary of state, and he or she may well have a greater hand in setting foreign policy, given the precarious nature of the U.S. economy.

Although the most recent GDP estimates show that the economy grew at a 3.1% pace in the third quarter of 2012, growth in 2011 was around 1.7%, and any number of global factors could topple even an otherwise impregnable recovery.

Consider all of the key international issues on U.S. president Barack Obama’s agenda over the next four years:

  • the ongoing eurozone crisis and the destabilizing blowback to the U.S. economy from a eurozone breakup or further recession, unemployment and depressed aggregate demand in the European Union;
  • in the world’s second-largest economy — China — a new leader in Xi Jinping will face a slowing economy and a renminbi currency that remains elevated in value vis-a-vis the U.S. dollar;
  • in the world’s third-largest economy — Japan — a new leader in Shinzō Abe will embark upon a massive public spending binge in a country that’s set to become the largest external holder of U.S. debt (supplanting China, which held that role for a decade, and which has seen its own U.S. dollar inflows from export trade slow over the past four years);
  • Obama will want to leave office having concluded the Trans-Pacific Partnership, an ambitious trade and cooperation agreement among various North American, South American and Asian countries;
  • as the United States transitions from a net energy consumer to a net energy producer in the coming decade or so, foreign policy in the Middle East will become relatively less important as the United States becomes less dependent on Arab oil; and
  • for the first time in a generation or more, ‘investment’ and ‘boom,’ rather than ‘AIDS,’ ‘civil war,’ ‘famine’ and ‘genocide’ are more applicable to sub-Saharan Africa, taken as a whole — there remain major problems, but for the first time, the narrative of ‘cheetah’ economies from Nigeria to Ghana to Ethiopia has outpaced the narrative of horrors (like the ongoing violent morass in the Democratic Republic of the Congo).

All of that means Obama’s next treasury secretary — whether current chief of staff Jacob Lew, BlackRock CEO Larry Fink or someone else — will be at the forefront of the Obama administration’s foreign policy in the next four years.

Remember, too, that the chairman of the Federal Reserve, Ben Bernanke, has been more important than anyone else in the United States over the past four years in stabilizing the world economy after the 2008 financial panic, and his continued emphasis on expansionary monetary policy has implications that go far beyond the U.S. economy.  His term ends in 2014, and he’s indicated he won’t stay on for a third term; minds have been known to change in Washington, but economic policymakers and investors alike will be keenly interested in the policy background and ideas of Bernanke’s successor — a choice that will likely be shaped with input from Geithner’s successor (and who may even be Geithner himself). Continue reading The next U.S. treasury secretary will be more important to world affairs than John Kerry →