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Observations of an Expat: Too Big to Fail

Tom Arms

The US Treasury is too big to fail. Failure, however, is a real possibility. In fact, Federal Reserve Bank Chairperson Janet Yellen warned earlier this week that the government would be forced to default on its loans on 18 October unless the self-imposed cap of $28 trillion was raised.

Reluctantly, the Senate voted 48-51 to push up the ceiling by $458 million and postponed decision day to 3 December when the battle will be recommenced.

There is a string of dire warnings if the cap is not raised by trillions in the run-up to Christmas. Forty per cent of financial aid would be affected which would possibly mean no housing benefits, child benefits, social security, Medicare or Medicaid payments. Federal employees pay would be jeopardised. America’s credit rating would be downgraded. Interest rates would rise affecting mortgages, business loans and credit card payments. Inflation would go up with the obvious impact on prices and pensioners on fixed incomes. The stock market is already teetering and could plummet. The dollar’s position as the world’s only reserve currency would be jeopardised, and because America is the globe’s biggest economy, the rest of the world will suffer.

The public debt ceiling has been raised more than 100 times since it was first imposed in 1917. Many of those occasions involved a bitter time-wasting partisan battle on Capitol Hill. And still the ceiling goes up and up. In 2007—just before the banking crisis– Congress was worried because the debt stood at $5.035 trillion. They raised the cap. Just 11 years after the 2008-2009 banking disaster public debt was $21.019 trillion and the country still had covid-19 to come.

The coronavirus pandemic has cost $2.95 trillion, a big slice of which was simply added to the debt mountain. President Biden wants an additional $3.5 trillion budget this year. Roughly $2.5 trillion would be spent on physical infrastructure and another trillion for what is being called “social infrastructure.”

Republicans and Democrats agree that big money needs to be spent on repairing America’s neglected and crumbling roads, dams, bridges, airports, railways, water, electricity, schools, hospitals…. Donald Trump earmarked a similar amount in his budget plans. But the Republicans are less keen on Biden’s plans to spend a trillion on projects such as improving racial equality, in-home care and affordable housing. Nor do they like his proposal to reverse Trump’s tax policies and raise a trillion dollars over 15 years by increasing corporation tax from 21 to 28 per cent.

It is America’s proud boast that it has never defaulted on a loan. It came close in the aftermath of the Revolution but managed to scrape by. For most of its history, it has dispensed with caps and political control of the public debt. There was a brief period during the Panic of 1837-38 when a cap was imposed, but it was not restored until 1917 when the US was faced with the staggering cost of World War I.

The 1917 Second Liberty Bond Act gave the Treasury discretion to raise money by the sale of bonds and other limited loan arrangements as long as the amount raised remained below a level set by Congress. In 1939—at the tail end of the Great Depression—Congress passed the US Public Debt Act which forms the legal structure for the current debate.

Very few developed countries have an equivalent to the Public Debt Act. In Europe, the only other country with a similar system is Denmark. Various alternatives have been suggested as alternative debt mechanisms. They include everything from national crowdfunding to cryptocurrencies.

The International Monetary Fund (IMF) has for many years suggested that the US adopt a “Sovereign Debt Restructuring Mechanism.” This was used in the 1980s and 1990s reasonably successfully to help developing countries out of their debt crisis. Sovereign Debt Restructuring is basically a national version of America’s Chapter 11.

One thing is clear, an American default would, as Ms Yellen, said: “permanently damage the US economy”. And if the US economy is damaged so is the world.

Tom Arms is the foreign editor of Liberal Democrat Voice. His book “America Made in Britain” is published next week. To pre-order a copy click here https://www.amberley-books.com/america.html .

World Review

The centuries-old Greece-Turkey antipathy has plagued the Eastern flank of NATO since its foundation in 1949. It is now about to become much worse. The reason: A France-Greece mutual defence alliance was ratified this week by the Greek parliament. Kyriakos Mitsotakis and French President Emmanuel Macron claim the treaty will become the cornerstone of an independent European defence policy. Possibly, but it also raises difficult questions about Turkey’s role in NATO and Europe.  The deal is the first intra-NATO mutual defence pact within NATO, and it is clearly aimed at protecting one NATO member (Greece) from attack by another alliance member (Turkey). That is not good for NATO. It is also another nail in Turkey’s possibly already dead bid for EU membership and pushes the country further away from secular Europe towards the Islamic world. That too is undesirable. However, greater European responsibility for its own security is good.

It’s official. We are in a global pandemic. Covid-19 has reached Antarctica. Thirty-six people at Chile’s Bernard O’Higgins Antarctic research station have tested positive for the virus. But there is very good news on other health fronts. There is now a vaccine for malaria. The disease is responsible for 400,000 deaths a year, most of them in Sub-Saharan African and most of them of children under the age of five. The vaccine is the result of a cooperative effort of the Bill and Melinda Gates Foundation and Ghana’s National Malaria Control Programme. The pilot vaccine has been successfully tested on 800,000 patients. It is not perfect. It is only 37 per cent effective in preventing the disease, but those who contract it after being vaccinated are more likely to survive. The other problem is that administering the vaccination is complicated. It involves three jabs over 18 months and every stage of the vaccine has to be refrigerated. But it is still a major success and will save hundreds of thousands of lives a year.

Taiwan, China, the US and a lot of other countries are in danger of falling into the trap of unintended consequences. Looking at it logically, Beijing does not want a war with Taiwan. Such a conflict would very likely draw in the US with terrible results for everyone. The Chinese want the Taiwanese to “volunteer” to rejoin the mainland and are stepping up air force sorties to “encourage” them to do so. This month, there have been several hundred Chinese fighter aircraft flights right up to the edge of Taiwanese air space. This has caused serious concern in Washington and Taipei. The very real danger is that one day, one Chinese pilot will literally cross the line. A Taiwanese fighter jet will be scrambled and will shoot it down. That would be the unintended consequence with serious repercussions.

There are not many issues that unite America’s Republicans and Democrats, but they do agree to hate Facebook. This week Senators were provided with top drawer ammunition by whistleblower Frances Haugen, a Harvard graduate who was working in Facebook’s counter-terrorism and anti-hate departments. She basically told a Senate subcommittee that Mark Zuckerberg’s social media giant put the company before the country and was writing algorithms that ensured users stayed on the Instagram and Facebook websites as long as possible rather than trying to limit racism and anti-democratic messaging and health-damaging messages for teenagers. Democratic Senator Ed Markey said Ms Haugen was “a twenty-first-century American Hero.” The senators promised Ms Haugen that they would hold Facebook to account. But can they? There has been talk of using anti-trust laws to break it up. But that would only create hundreds or even thousands of competing mini-facebooks, each with a similar corporate mentality. It fined Facebook $5 billion, but that is mere bagatelle for Zuckerberg and his shareholders. Some observers say that Ms Haugen’s testimony could be a turning point in favour of a more responsible social media. But they don’t say how.

Britain, according to Prime Minister Boris Johnson, is a country in transition. It is moving away from the “same old broken model” to a “high-wage, high-skill, high-productivity” country. The country just needed to work through a string of post-covid/post-Brexit problems to reach the sunlit uplands. There are just a few problems with this happy image. First, how long will the growing list of shortages continue? Second where will the workers come from in a country with a low unemployment rate of 4.7 percent? What impact will rapidly increasing wages have on inflation? What impact will rising wages in the private sector have on public sector workers where pay rises are severely restricted? Who is going to pay for the training to achieve high productivity? Where is the money coming from? How can Boris boast about Britain being one of the world’s wealthiest countries while branding it “broken”? Finally, where are the policies—the route map—to take the UK out of the slough of despond to the sunlit uplands?

 

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