Moral Outrage
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Global repercussions of US debt ceiling agreement

Just as a default by the U.S. would have had an outsized impact on the global economy, due to the unique position of America in the world, a deal struck to alter the direction of fiscal policy will also have a tremendous effect. The decisions will reverberate through the world economy for years to come.

First of all, in the short term, we can all forget about U.S. fiscal policy being employed to stimulate the anemic recovery in the world’s largest economy. Companies and workers from southern China to southern Africa depend on the giant U.S. economy, so a slow recovery in the U.S. eats into growth prospects everywhere.

Secondly, the debt deal hasn’t fully determined the future course of U.S. fiscal policy, and that sad fact means haggling in Washington will continue to plague world markets. That means continued uncertainty in global financial markets for a long time to come.

Third, budget cuts will have a ripple effect through the entire world, and the world is going to have to adjust to what gets cut. Everyone from the Saudi royal family to Taliban commanders will be watching closely to see how the U.S. restructures its military spending, to look for new weakness, and new opportunities.

Fourth, the debt deal – or, more specifically, the ugly process of getting the deal done – could well hasten the decline of American influence in the global economy.

The irresponsible brinksmanship and childish squabbling made American political leaders look more like The Real Housewives of New Jersey than the leaders of the free world. If I were a policymaker in Tokyo or Beijing or New Delhi, I’d want to make myself less dependent on a country where the political process appears unreliable and heightens the risks to the global economy. That gives countries like China, for example, even more incentive to diversify away from holding U.S. assets, undermining American dominance of the global financial system. That’s not positive for America’s future standing in the world.

[Excerpts of TIME article by Michael Schuman]


One Response to “Global repercussions of US debt ceiling agreement”

  1. Governments across the world, but particularly in Europe, have been facing tough decisions this year, and they slashed government spending and increase taxes.

    The contrast to the U.S. could not be greater. Congress’ refusal to raise the debt ceiling was viewed worldwide as a rebellion not against economic policy or the president, but rather against Congress’ own existing commitments.

    Congress’ intransigence was couched in terms of fiscally-responsible rhetoric. Ironically, this behavior was merely another demonstration that the U.S. system of government is unable to manage its public finances sensibly.

    This episode has exposed the dysfunction of the American political system. Policymakers and market participants in Europe should be very concerned about developments across the Atlantic. A minor sneeze in a U.S. midterm election could give the global economy far more than a cold. We also learned that American politics, not only economics, could potentially send ripples across the world.

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