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America's dogfight over debt woes

10:33, June 07, 2011

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By Li Hong

The dogfight between the two major U.S. political parties over whether to raise the federal deficit ceiling and avoid an immediate default on American debts has just begun.

The stakes are high that, if no agreement is reached in due time, the U.S. would be sent to another financial crisis, and the global economy would face the dim prospect of another great recession, just three years after a devastating economic catastrophe caused by a sub-prime mortgage debacle done by the Wall Street.

China, now holding more than 8 percent, or nearly $1.2 trillion U.S. Treasury bonds, is certainly concerned about the potential default quagmire, as the security of the debts repayment is on the line.

Currently, Chinese online chat-rooms are awash with ordinary people's demands for Beijing to draw down its purchase of American debts, and shift to other securer investments including buying more oil and resources as strategic reserves.

On Tuesday, U.S. Congressional Republicans defeated a bill that proposed for a $2.4 trillion increase in the nation's debt limit. The lopsided vote, with just 97 in favor of the measure and 318 against, doesn't bode well for the impending difficult negotiations between the White House and Congress.

The conservative Republicans are demanding deeper cuts into Obama's government spending plans to accompany any rise in federal borrowing. Their demand seems popular among a majority of American voters. For a long time, Americans have believed that their governments have been addictive to spending on borrowed money, dragging the world's largest economy to a big fiscal hole.

Analysts say that the Republicans will have to back down. If they refuse to raise the debt ceiling – now set at $14.29 trillion, the U.S. government will run into bankruptcy, which will immediately cause a flight of the U.S. dollars and send the U.S. economy back to contraction, if not a depression.

Eventually, a compromise between Obama-led Democrats and the conservative Republicans will be reached before August 2, the date the Treasury Department believes its coffers will run out.

However, Tuesday's vote sends a clear signal to US politicians that their long affection for deficit spending is simply unsustainable. House Speaker John Boehner said: "It's true that allowing America to default would be irresponsible, but, it would be more irresponsible to raise the debt limit without simultaneously taking dramatic steps to reduce spending and to reform the budget process."

Actually, the U.S. could choose to reduce federal funding on retirees' pensions and medical care appropriations to constrain government spending. The White House and Congress could also agree to increase taxes on personal income and corporate income to boost the federal budget.

But, it is politically perilous for both Democrats and Republicans to tell Americans to tighten belts, as the 2012 general elections are drawing nearer. It is hard for Americans to get rid of their habit of lavish spending and saving less.

A few pundits in the U.S. have crowed against Obama administration taking austerity measures to address America's woes. They are recommending loose monetary policies – typically the "quantitative easing" by the Federal Reserve – and flood American banks with printed dollars.

These people's argument is that Washington should do all it can to avoid Japan-style deflation (ever since 1990). They have been openly talking about ramming up U.S. inflation to the "desired four percent" with non-stop spending on borrowed money, and leaving the job of addressing astronomical debts to future generations.

The articles in this column represent the author's views only. They do not represent opinions of People's Daily or People's Daily Online.

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About this column

Li Hong has been a reporter and column writer, mainly on China's economy and politics.

He was graduated from Beijing Foreign Studies University, and once studied in University of Hawaii and the Poynter Institute in Florida.

Columnists

John 
Milligan-Whyte 
and
Dai MinJohn
Milligan-Whyte
and
Dai Min

John Milligan-Whyte and Dai Min, the executive producers and co-hosts of the Collaboration of Civilizations television series adapted by the eight books they wrote in the America-China Partnership Book Series published in English and Mandarin in 2009-2010 that created the "New School of America-China Relations." They founded the America-China Partnership Foundation and Forum in 2008 and the Center for American-China Partnership in 2005, which was recognized in 2009 as "the first American think tank to combine and integrate American and Chinese perspectives providing a complete answer for America and China's success in the 21st century."

Li HongmeiLi Hongmei

Li Hongmei, editor and columnist of PD Online.

http://english.people.com.cn/90002/96743/7402082.pdf