Americans can ill-afford this debt ceiling debacle

July 25, 2011

By Mohamed A. El-Erian
The opinions expressed are his own.

Friday’s stunning and very public quarrel between the president and the Speaker of the House of Representatives was the catalyst for a weekend of frantic negotiations on how to increase America’s debt ceiling, maintain the country’s sacred AAA rating, and avoid a near-term default. Meanwhile, administration officials and members of Congress took to the airwaves on Sunday trying, but largely failing, to strike the balance between statesmanship and another round of the Washington blame game.

It was hoped that all this would serve as a prelude to a political compromise announced just before the opening of Asian markets. This did not materialize. But while another self-imposed deadline has been missed, it is likely that the nation’s leadership will stumble into a short-term compromise over the next few days — one that raises the debt ceiling and avoids a debt default but, importantly, leaves the AAA rating extremely vulnerable and does little to lift the damaging clouds hanging over the US economy.

It will come down to the wire; and when the stopgap compromise is reached, many in Washington will declare victory and, in the process, claim credit for averting a national disaster. Yet the resolution will likely be temporary, and the damage will be real and long-lasting — both of which render an already worrisome situation even more difficult going forward. Indeed, by illustrating so vividly to the whole world what is ailing America, the weekend’s political theatrics should make us all worry even more about the world’s largest economy.

First, consider the context. America’s already-fragile economic psyche and its global standing have taken a material hit. Forget about “animal spirits” for now. Instead, worry even more about an economy that is already having tremendous difficulty sustaining an acceptable growth momentum, and that already suffers from an unemployment crisis that is increasingly protracted in nature. Analysts will now scramble to again revise down their projections for growth, and up those for unemployment.

Second, remember the content. The debt and deficit issues that are at the root of the debt ceiling drama are, unfortunately, a small part of a much larger set of structural impediments to employment, investment and wealth creation. The housing sector is still languishing, credit intermediation is uneven, infrastructure investment is lagging, job skill mismatches are increasing, and income and wealth inequalities are worsening.

Third, lament the process. Virtually all Americans worry about these problems and too many feel them acutely on a daily basis. Astonishingly, however, our elected representatives and their appointees are just bickering and, distressingly, failing miserably to communicate a vision that provides for even the smallest amount of medium-term optimism. The endless political squabbles compel all to question whether politicians are aware of Main Street’s realities, let alone up to the task of making things better.

Finally, don’t forget the international angle. Anyone who travels will tell you that America’s friends and allies are bewildered at what is going on here (and its enemies rejoicing). This comes at a time when the country can ill-afford to lose the confidence of large foreign holders of US Treasury bonds, overseas manufacturers with factories here, those that use the dollar as the reserve currency, and the many who have outsourced to here the intermediation of their hard-earned savings and pensions.

Yes, after taking it to the edge, it is still highly probable that Washington will manage to step back from defaulting on the national debt. But no one will, or should, feel good about how this happens.

It is highly likely that the solution will be a band aid that has to be replaced in the coming months. In the meantime, America’s structural injuries will deepen and, to an extent that was unthinkable, America’s economic future will become even cloudier.

This country’s turnaround is less of an economic engineering predicament and more of a political fix. But if Washington continues to squabble and if acrimony intensifies further, it will quickly become both.

This piece originally appeared on the Huffington Post.


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I am scared of having a terminal disease or something that’ll require surgery.

Posted by ta-boo | Report as abusive

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.” – Sen. Obama March 20, 2006

Posted by DrJJJJ | Report as abusive

“Ill afford”… what an interesting choice of words.

Your article underlines the obvious: two opposing philosophies are playing high-stakes chicken; the USA has a severe spending problem; the posturing underway appears to re feels like an argument about posturing resembles re-arranging deck furniture on a sinking Titanic.

But all this is understood.

What I and many readers would like to know,
Mr. El-Erian, is: in your opinion, which side is right?

Wouldn’t all the delay be justified if the outcome was CC&B? A demonstration to the world- and to ourselves- that we posess the resolve to deal with our problems?

Posted by YouDude60 | Report as abusive

Cutting spending, during a recession, is a simplistic and stupid answer. Made famous in the Great Depression.

The reason the Republicans are pushing it so hard, is they are hoping to continue economic malaise under Obama. So they can blame him, and win the election.

The needs of Americans, are being put 2nd to the Republicans petty & dangerous political games. That’s un-American, or downright treason.

Posted by ThomasW | Report as abusive

The starting point of this current impasse was a Republican decision to turn a routine debt ceiling vote into a crisis. Democrats, Obama, and some sane Republicans have shown enough willingness to craft a reasonable plan to deal with the debt and deficit issues so that we should have had a resolution by now. The fact that right wing Republicans have been so intransigent shows that the intention all along was not to deal with the debt and deficit issues but to make Obama a “one term” president. Those playing this sick game have shown that they do not have interest of the country at heart.

Posted by citizen007 | Report as abusive

The Republicans raised the debt ceiling under Bush 2 several times while the budget deficit continued to grow. This chart proves my point: ive/2011/07/the-chart-that-should-accomp any-all-discussions-of-the-debt-ceiling/ 242484/

Republicans would rather risk the US economy, credit rating and financial stability in order to maintain the tax breaks for their campaign funders: oil & gas sector, hedge funds, real estate investors, etc.

While my effective tax rate is 56% (including all fed, state, city, excise, real estate taxes on a low six figure income), John Paulson pays a rate of 15% on a $3 billion income.

However, the Republican and Blue Dog Democrats just want to cut social security, medicare and other middle class programs that the middle class has paid for.

Before anyone blames Obama and the Democrats, remember that Bush and the Republicans started 2 wars without and funding. What kind of fiscal discipline is that?

Posted by Acetracy | Report as abusive

America was $75 million in debt in 1791…five years before George Washington wrote his Farewell Address and told all those turnips he was getting out of government and going back to his farm.

The American people didn’t hear him make that speech because he was to embarrass over not having any teeth.

From what was written the people of America have truly let George down especially this part….

“Observe good faith and justice toward all nations. Cultivate peace and harmony with all… The Nation which indulges toward another an habitual hatred or an habitual fondness is in some degree a slave. It is a slave to its animosity or to its affection, either of which is sufficient to lead it astray from its duty and its interest … Tis our true policy to steer clear of permanent alliances, with any portion of the foreign world.” – George Washington, Farewell Address, 17 Sept. 1796.

George Washington’s picture is on every dollar bill and today there are more George Washington’s being held in foreign hands, corporate America and drug cartels than anytime in American history but the elephant’s and jack@’s that act like turnips on Jenkins Hill in Washington D. C. can’t get past their own ego to do the right thing for we the people.

The Constitution wasn’t written for a government, church nor corporation and until the we the people realize that and get off their lazy @….more and more debt will build until George on the dollar bill cries real tears.


George can’t help anyone in America if Americans keep sending him to foreign lands.

It’s about Made In America, nothing more, nothing less.

Posted by madmilker | Report as abusive

Is democracy served by a two-party system and elected divided government? Not in an age of career politicians exhibiting such selfishness. The founding fathers must be turning over in their graves. How could they have foreseen the dearth of leadership and principled men, we experience in government today. Is it possible we are not up to the task of this grand experiment called U.S. democracy? There would be no stomach for change, but if this is the future, perhaps our only chance for effective government would be a parliamentary approach? Just the musings of an old man…

Posted by YukonC | Report as abusive

Since we nominated ourself’s the worlds protecter or savior of disator’s or wars at an unknown cost to the US tax payer’s. what do we recive in return? Maybe a thank you! Don’t you think charity should begin at home! Does
New Orleans come to mind,
Now that we are in between a rock and hard place our congress thinks we should accept a cut in our SS and Medicare,that I paid for. Would you think it would only be fair for them to cut their salary in half which would still be more than most middle class american’s earn. Also change their insurance to medicare.Also stop their check when they stop ours.I think since I have to pay 45% of my income to taxes should not the higher income pay 45% of their income?

Posted by hardhead | Report as abusive

Raising the debt ceiling without a real concrete plan (Cut, Cap and Balance) is playing chicken with our future anyways, so for the lame liberal responder here indicating that the Republican’s are only doing this to make this lame hypocritical president look bad (he is doing a good enough job on his own) is pure partisan posturing. My children and grand-children do not deserve to be left with this kind of irresponsible spending and debt just because you are unwilling to cut spending. Proof the democrats do not care one iota about the debt or the burden they are putting on the American population is that they are totally against a constitutional amendment that would make it law to have a balanced budget, showing they only want to tax and spend without limitations. And those who think that eventually that will not cause us greater harm down the road than defaulting now is smoking something that is illegal.

Posted by LarryR1958 | Report as abusive

If the political debate gets completely intractable, as it nearly is now, then I suspect Mr. Obama will probably issue an executive order on 8/2 to unilaterally raise the debt ceiling by about $3 trillion.

Ostensibly, that will prevent a default. However, in today’s extremely divisive political atmosphere it is also likely to spark a full-blown constitutional crisis. There will be such a clamor for Mr. Obama to be impeached that the country would be plunged into a political ‘civil war’, if you will.

You’d then have about half the country, in effect, screaming for his executive order to be repealed, which would plunge the U.S. into short-term default if that cry succeeded.

Under the conditions of profound uncertainty over whether or not the executive order would stand, and thus whether or not the U.S. should have been in a state of default, what would the credit ratings agencies do? I could envision them hitting the U.S. credit rating so hard that it would come dangerously close to a rating of short-term default. Global confidence in the U.S. and in Treasuries would be massively undermined.

This may be Mr. Obama’s catch-22. If he issues such an executive order he likely plunges the U.S. into the scenario above. But if he doesn’t, the U.S. goes into short-term default very soon after 8/2.

Either way, the U.S. is already suffering a profound loss of respect and confidence on the global stage.

Posted by NukerDoggie | Report as abusive

“While my effective tax rate is 56% (including all fed, state, city, excise, real estate taxes on a low six figure income), John Paulson pays a rate of 15% on a $3 billion income.”

That’s why Mr. El Erian is talking about the need of a political decision. America has no economic problem, it has a structural political problem with dare economic consequences. Even the very rich recognize and admit that, but nobody has the guts to make a change.

Posted by Ananke | Report as abusive

It is impossible to imagine that we would be on the brink of default — for no reason — were it not for the constant barrage of right-wing media, especially the Murdoch properties.

The US has become an easy pushover for those demanding their “rights.” In this case, it’s the right to broadcast grossly misleading propaganda 24 hours a day simply because certain groups can afford to finance it. That is not freedom of speech, it’s freedom to lie to the public with impunity, and our political system is near collapse because of this essential misinterpretation of what the First Amendment means. That foundation of our liberty came into existence to safeguard the right of the powerless to speak. It is being used to allow the powerful to drown out effective opposition with lies delivered through a huge megaphone.

Something has to give. Wouldn’t it be ironic — not to mention rather sad — if our economic strength were to be sacrificed on the altar of a badly mistaken interpretation of our founding document?

Posted by Ralphooo | Report as abusive

Two things have become increasingly obvious over the past several decades: 1) Our economic system is failing and requires an endless expansion of debt in order to keep it afloat, and 2) We have a two party political system that has become increasingly dysfunctional in which the two ideological combatant groups expend 90% of their energy trying to prove that the opposing agenda is wrong and that theirs is right. Forty years ago social critic Lewis Mumford stated that “any economy that boasts of its uncontrolled expansion is actually in a state of nightmarish disintegration.” There is no balance in our economic system anymore. We simply incur more debt to pay for more things in an endless cycle of gluttony in both the public and private sector. And all the while our political “leaders” bicker over their political agendas. It’s akin to arguing about which tune the band should be playing on the Titanic as it slips into the sea.

Posted by JackKangaroo | Report as abusive

Childish GOP have no choice but to default govt or Obama will get re-elected. Righteous Republicans must revolve from within or you kids will become the bankrupt parents’ kids of bankrupt families. They are poor because the authority suppress economy flows and resource accesses; not that because they don’t have education or technologies. Crisis religions are evil religions that their preachers preach fears while their inner circle creates crisis. America is not broke but they dig you into it. A country must be poor if its govt doesn’t spend money to improve the population’s living standard and the richest few will have no choice but to exploit even into themselves and their own families. Sad sad lives to live there.

Posted by beancube2101 | Report as abusive

There is NO chance of default! Are people really that ignorant? Not getting the debt ceiling increased does not stop the income flowing into Washington! They still collect more than enough taxes to pay the interest on the debt (which is all we ever do or have to to keep from default), SS, and the military and keep basic government functions going, just like the last 18 times we were at this point. Get a clue, or stop with the lies. And if you think anyone in Washington cares about you, other than your vote, you need a psych eval. 1/04/08/6432513-this-would-be-18th-gover nment-shutdown-in-us-history

Posted by Alisair | Report as abusive

Few realize how precarious the situation has become… if the country collapses under the present debt load, the nightmare of the ‘Dirty 30’s’ are gonna return to haunt once again. The excesses of the financial services companies/industry, easy mortgage credit, maxed out credit cards, foreclosures, bankruptcies and chronic unemployment may well cause a complete financial collapse likely resulting serious social turmoil.

In the Arab countries, hungry but unemployed well educated and intelligent people are dying in the streets fighting the corrupt regimes and their cronies, the people who maintain an iron grip on the economy for their own benefit…

Is the corrupt financial services industry in the USA any different?

Posted by TheLeftCoast | Report as abusive

From July 25th. “It will come down to the wire; and when the stopgap compromise is reached, many in Washington will declare victory and, in the process, claim credit for averting a national disaster. Yet the resolution will likely be temporary, and the damage will be real and long-lasting” This prediction was exactly on target.

Conclusion, “it is likely that the nation’s leadership will stumble into a short-term compromise over the next few days — one that raises the debt ceiling and avoids a debt default but, importantly, leaves the AAA rating extremely vulnerable and does little to lift the damaging clouds hanging over the US economy”. AGAIN, right on target.

Posted by JamVee | Report as abusive

Ten years ago when Republicans let the horse out of the barn and it began kicking our economy to death, Alan Greenspan, a Republican should have raised interest rates to slow the economy and stop the over spending from easy credit. He failed to do that. The rest is History. Obama has been trying to get the horst back into the barn but Republicans hate Obama because he is pro Union. The rest is history. Unreasonable strong arm rulers in other nations have proven bad judgment causes civil unrest. I hope our strong arm billionaires don’t make the same mistake in this country. The fallout is not worth it. To print this is to be honest, fair and decent.

Posted by ugg | Report as abusive