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Nadine Chalmers-Ross: Debt games

opinion Nadine Chalmers-Ross

Published: 1:06PM Friday July 29, 2011 Source: ONE News

You could call it a deadlock, an impasse, a stand off.

But you could equally call the inability of US Democrats and Republicans to set aside their differences on raising the Government's debt ceiling a game.

I'm just not entirely sure which game it is they've been playing.

At times, it appears to be like a game of political chicken - who will blink first?

At other times it seems more calculated, like a game of chess where both sides desperately want to be the ones to say "check mate".

But more often it seems like they're simply playing silly buggers with the Government's balance sheet and, if the doomsayers are to be believed, by failing to raise the debt ceiling they risk bringing the roof of the global economy crashing down.

It all sounds a bit like Chicken Little, doesn't it? The sky is falling, the sky is falling!

Or, it will do on August 2 when US Government debt will hit $US14.3 trillion - the debt ceiling.

However, the dire warnings haven't been the preserve of the children scrapping it out in Washington's political playground, but have come from the institution that holds the purse strings - the US Treasury.

It warned that if the Government fails to act it would trigger a self-inflicted crisis "more severe than the one we are currently recovering from".

As someone who had something of a ringside seat to the last financial crisis - that's a grim warning indeed.

But is it overblown?

We know the debt ceiling has been raised many times before; in fact 102 times since it was introduced in 1917, 78 times since 1960 and George Bush raised it eight times during his two terms in office.

But history also shows they've also failed to raise the debt ceiling three times before "and not one interest payment on debt was missed, Medicare has always been paid, Medicaid has always been paid and social security has never been missed," Kevin O'Sullivan from OM Financial told me on AMP Business this morning.

He argues that despite the warnings and even in the absence of a deal before the August 2 deadline, the US still has options and it will not default.

He says there will be some bills that it won't be able to meet but, even then, there are options.

"They could raid a pension fund, basically what that means pay your mortgage, and then pay some of your other bills and go, 'Actually, I'll just steal from my KiwiSaver and pay the rest of my bills because the bank won't let me increase my overdraft this month'."

Most commentators remain confident a deal will be done. A vote on Republican John Boehner's plan is due to be voted on by Congress today.

Issues not over

But America's problems aren't over once the US Government eventually, inevitably, raises its debt limit.

Raising the limit must involve a plan to get America's burgeoning debt under control, in order to appease the credit rating agencies, but doing that will create problems of its own.

Unemployment in the United States is still over 9% and despite some pretty solid indicators of corporate economic health emerging on Wall Street, companies just don't appear to be hiring back the workers they laid off when they slimmed down to survive the global financial crisis.

That could well be exacerbated if the biggest single spender in the economy is forced to stop spending quite so much.

The technical term for it is fiscal drag, but the concept is actually quite simple - if the Government has to pare back its spending aggressively, it could affect the country's already tepid economic growth and that won't do anything to move people from the dole queue to the lunch queue at the office cafeteria.

Then, there's China.

China, as the largest single holder of US Treasuries, effectively has America by the short and curlies.

Regardless of how much the US permits itself to borrow, if China decides that it doesn't want to lend the US any more money or that it wants back what it has lent them, then "financial armageddon will probably ensue for the whole world".

When you consider that, it seems likely the games in the US have only just begun.

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  • nztifosi said on 2011-06-03 @ 17:26 NZDT: Report abusive post

    Just when my family was making headway financially the government chose to cut tax and put GST up. At the same time funding to the school I work at was cut resulting in an hours cut for me. Result? We are now worse off than ever before! And now we are supposed to spend, save, donate to Canterbury and every other charity as if the current situation were the working man's fault. It is the speculaters and the financiers along with the government who got us into this mess! -now they can get us out!

  • deltics said on 2011-05-19 @ 12:38 NZDT: Report abusive post

    Saving isn't what NZ needs right now, it needs to pay off it's debt AND increase spending. Money paid into KiwiSaver doesn't reduce our current debts and doesn't circulate around or stimulate the economy! So it actually makes a lot of sense for the government to reduce the incentives to pay into KiwiSaver whilst emphasising the need to be more prudent in our spending (paying down debt) without closing our purse strings too tightly in the process.

  • ceejaygee said on 2011-05-15 @ 12:33 NZDT: Report abusive post

    i currently pay 4% into kiwi saver i would like to pay 6% unfortunately there is no provision for that hopefully the govt have thought about that. as to the tax credit cut not a clever idea, maybe they could make it totally tax free then we could really save for our retirement then they could cut the tax credit altogether

  • Danthetaxpayer said on 2011-05-14 @ 19:10 NZDT: Report abusive post

    I would also like to ask how is it retirement savings are even a priority when we fail so badly as a country to take care of our children? Children who are meant to be our future taxpayers helping to fund future NZ Super? Children who are often neglected, illiterate & who struggle to get the medical assistance they need due to health care shortages and whose families often have to fundraise? Why are these things not a priority?

  • Danthetaxpayer said on 2011-05-14 @ 19:07 NZDT: Report abusive post

    I'm confused: how is it saving when most of the 1.67 odd million people with Kiwisaver are probably receiving some kind of government assistance. Assistance is for hardship and to meet basic needs - food, clothing, shelter only. If they have enough spare to put into Kiwisaver which then gets matched by more taxpayer funds earned by the hard work of others, then isn't this the horse before the cart? Further, how can it truly be savings when we are borrowing $300 million each week?