Nikhil Kumar: After the fiscal cliff 'drama', is it time for Bernanke to coin the debt canyon?
Mr Bernanke knew 1 January was not a deadline for doom but rather a milestone
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Friday 04 January 2013
US Outlook So, what did we learn from furious debate over the fiscal cliff? Lesson number one has to be that even central bankers, despite their reputations for wonkishness, are vulnerable to the occasional bout of melodrama.
The term fiscal cliff, after all, is widely attributed to that doyen of monetary policy makers, the Federal Reserve chairman, Ben Bernanke. His imagery implied sudden economic catastrophe, as if a minute's delay in a budget deal would send the United States economy hurtling down into some dark economic abyss.
And yet everyone knew – Mr Bernanke knew (more on this later) and the politicians so theatrically prevaricating in DC knew – that 1 January wasn't so much the deadline for doom, but rather a milestone. Had a deal not been struck, the economy would have begun going down a troubling road that, in time, would have spelt slowdown and eventually recession.
Lesson number two is that sometimes a deal is not a deal, no matter how spectacular the "relief rally" on the markets.
The Biden-McConnell pact, besides green-lighting a tax rise for some 160 million Americans by allowing the expiry of the payroll tax holiday, which kept payroll levies down by 2 per cent, has left perhaps the most important issue unanswered. The government's room for manoeuvre on the debt ceiling, that uniquely American construction which puts a cap on the money the federal executive can raise by issuing debt to pay for programmes authorised by Congress, will run out as February comes to a close.
A failure to raise the limit would mean that the government runs out of day-to-day cash. And such paralysis would constitute a sudden blow. Not that it'll happen, of course. We have been here before, when, in 2011, the politicians waited until the last minute to do what they knew they eventually had to do.
And yes, they did provoke a downgrade of the US credit rating. But, despite the warnings from the likes of an erstwhile private-equity executive called Mitt Romney, who called the rating cut a "meltdown", and a bright, young Congressman called Paul Ryan, who in his mind's eye saw a debilitating tide of rising mortgage rates, the US survived the downgrade just fine (and mortgage rates fell). Whether the ratings agencies like it or not, US Treasuries have a deep market, deep enough to survive the scribbles of some agency analyst spooked by DC politics.
A deal, then, remains likely, as does the requisite brinkmanship in the run-up to its eventual announcement. Which brings us to the question of why Mr Bernanke, who is more expert in these matters than any newspaper writer, played up the hype.
Perhaps because he understands that while a little hype might irk one or two of his colleagues in the academy, it doesn't hurt in this most polarised of political arenas to put some public pressure on Congress, to push the senators and representatives to momentarily take off their ideological blinkers and accept economic reality. And so, maybe it's time for another coinage. Debt storm? Debt canyon? Over to you, Mr Bernanke.
- 2 Rarest Beanie Baby of them all could be sold for £62,500 on eBay
- 3 Professional big game hunter Ian Gibson crushed to death by elephant during hunt
- 4 Farmer told to tear down mock-Tudor castle after hiding construction behind hay bales
Migrants crossing the Mediterranean: Pope Francis joins calls for EU action on boat refugees
Yemen crisis: Meet the child soldiers recruited by the Shia Houthi rebels who have forsaken books for Kalashnikovs
Alan Rickman admits editing 'terrible' script with friends in Pizza Hut behind backs of writers on Robin Hood: Prince of Thieves
Rarest Beanie Baby of them all could be sold for £62,500 on eBay
Isis in Afghanistan: Group claims responsibility for Jalalabad suicide bombing that killed 35
The only black face in the Ukip manifesto is on the page about overseas aid
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
iJobs Money & Business
£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...
£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...
£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...