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.