Stephen Foley: The time for America to to get her finances back in order is running out


US Outlook: Take a look around, said the Fox News presenter, sarcastically, over a live webcam of Times Square in New York. "Life as we know it is merrily going on in the United States of America."

Ha-di-ha. When the US hit its debt ceiling on Monday, the $14.3 trillion limit set by Congress for the amount the federal government can legally borrow, the world obviously did not end. Fox got another chance to mock warnings of economic catastrophe and financial Armageddon that have come from the Obama administration.

The US is the only system stupid enough to require a second law raising borrowing limits when its legislature passes a budget that implies an increased deficit. So here we are, and now the country is running on borrowed time.

This week, the Treasury stopped issuing new debt to fund public pensions, and with a few more accounting tricks, it oughtn't need to borrow any more for a while to fund its expenditures. After that point (Treasury Secretary Tim Geithner says it comes in August) the choices get a lot harder.

Eventually, the Treasury would have to choose between paying benefits such as social security, paying federal workers, and paying the interest on its debts.

Republicans, and Tea Party representatives in particular, think this is all rather joyful, since it provides a second opportunity to squeeze government down in size, after they didn't get the cuts they wanted from the budget deal in the spring. The consensus is that there will be a political deal that raises the debt ceiling and introduces a new wave of federal budget cuts at the same time.

That is why the yield on US government debt has gone down, not up. Markets believe the outcome of this impasse will be a big fiscal contraction, with a resulting hit to the pace of the US economic recovery that forces the Federal Reserve to keep interest rates on hold at zero for longer.

I would be worried, though, by the increasing boldness of the cut-and-be-damned brigade. The consensus had previously been that a deal would have been reached before the US hit the debt ceiling. That has not come to pass. Each passing day emboldens those holding out for more reductions to spending.

The trouble is that it is not clear when a crunch moment will come. The budget deal in April was agreed with an hour to spare before the federal government would have been forced to shut down its non-essential functions.

Ultimately, the timing and the nature of the crunch moment is up to the Obama administration to engineer. It has to decide what unpleasant medicine to threaten. Will the Treasury set a date that it will stop paying soldiers? Or warn pensioners that their last social security cheque will be posted in August? Or will it threaten US bondholders with default?

The last is quite tempting. It would certainly be a comeuppance for Fox News, and for the entire habit of mind that refuses to believe in the possibility of financial Armageddon, despite the evidence of 2008. At the moment Wall Street is so discredited that no one believes Jamie Dimon when he says (as he did this week) that a US debt default will "dwarf Lehman" in its consequences, and the complexities of the markets make it hard to explain what might happen.

But US government debt is essential to every part of the financial system. It is the collateral in trillions of dollars of interconnected lending transactions. It is the lynchpin of numerous low-risk investment funds, including the money market funds that millions of Americans treat like bank accounts. A default on a US Treasury bond would rip up the underfabric of the financial markets. The only thing certain about the resulting uncertainty, is that it would lead to a panic.

So the Treasury cannot be so irresponsible as to threaten default. Even the suggestion that it has moved out of the "unthinkable" category, to "thinkable", would force a massive and destabilising change of behaviour on Wall Street.

Which is why its hand is weak, and why the Tea Partiers are on the march. More cuts are coming to the US, and a weaker economic recovery. Interest rates, far from going sky high because of default worries, may well go lower and stay low.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Telesales Executive - OTE £25,000

£13000 - £25000 per annum: Recruitment Genius: Would you like to be part of a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Are you passionate about sale...

Ashdown Group: Graduate Developer (Trainee) - City, London

£25000 per annum + benefits: Ashdown Group: A large financial services company...

Ashdown Group: Marketing Assistant - Financial Services Sector - London

£20400 per annum: Ashdown Group: An established and highly reputable organisat...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future