Tea party Republicans put dollar's reputation at risk

Commentary: Though a default is unlikely, long-term trust in the U.S. has been damaged

A protester at the Exempt America from Obamacare rally on Capitol Hill, Sept. 10, 2013, in Washington.
Drew Angerer/Getty Images

Barring an accident of political brinksmanship, the United States will not default on its debts and other obligations.

Economic conditions provide exactly zero reasons to worry that the U.S. cannot service its debts. The danger in the current crisis, therefore, is not catastrophic economic collapse.

Rather, the danger is that the House's tea party Republicans, in their zeal to block President Barack Obama's policies, especially on health care, have damaged investors' long-term trust in the U.S. government. And by thwarting the principle of majority rule, they have demonstrated a disrupting power that they may wield into the next decade, causing further erosion in confidence.

Trust is crucial to investment, economic growth, fiscal stability and the continuation of the tremendous benefits the U.S. gets from the dollar's serving as the global reserve currency. Tea party Republicans undermine that trust by voicing wild claims that have little to no basis in fact, especially their absurd assertion that the federal government is going broke.

Not going broke

The U.S. economy is on the mend, albeit too slowly. Under Obama, the federal budget deficit has been halved from what he inherited in the 2009 fiscal year. Yet polls show the vast majority of Americans believe that he has gone on a rampant spending spree.

Obama's plummeting budget shortfalls stand in sharp contrast to the eight years under President George W. Bush, whose rate of spending growth surpassed even that of Lyndon B. Johnson, who simultaneously waged war on Southeast Asia and poverty.

The Treasury will hit the debt ceiling, a limit first imposed by Congress in 1917, sometime between Thursday and early next month. If the ceiling is reached, the Treasury can, for a brief time, avoid default with accounting devices. The crudest of these is simply delaying payments of bills — the same tactic businesses commonly employ when cash flow shrivels temporarily.

Already market reactions show weakened trust. Fidelity, the mutual-fund company, rearranged its portfolios so they have no bond interest or redemptions due in the next few weeks. No doubt some investors panicked and, foolishly, sold federal notes and bonds, fearing an economic meltdown of 1930s proportions.

Tea party Republicans and their allies point to the downgrade of federal debt two years ago by one of the three big credit-rating agencies. They ignore the fact that concerns about political leadership, not economic factors, prompted the downgrade.

Does Speaker John Boehner have the courage to fall on a political sword for the good of the country?

Demand for Treasury notes and bonds remains remarkably strong despite minuscule interest payments. Last month the blended average federal borrowing rate was less than 2 percent, down from more than 3 percent when Obama took office and nearly 5 percent under Bush in 2006.

Record-low interest rates indicate that if the debt ceiling is raised, investors will continue to pour money into Treasuries.

The U.S. government is far from going broke. The federal budget deficit, measured as a share of the economy, has been slashed by more than half. It was 10.1 percent of gross domestic product in fiscal 2009, which began almost four months before Obama was inaugurated. This year, it is estimated at 4.4 percent. And the budget deficit is officially projected to fall to just 2.2 percent in 2017, when Obama will leave office.

The rapidly shrinking deficit contradicts tea party claims that the country is going broke. But even if deficits were growing, such claims are also contradicted by the Constitution: It is axiomatic that no sovereign nation with monopoly control of its currency can go broke in its own currency. The Constitution makes the U.S. just such a sovereign nation.

Boehner's choice

A large majority of Republicans and Democrats would vote today to lift the federal debt ceiling, reopen closed government agencies and otherwise act responsibly. But tea party radicals continue to block such votes in the House.

Republican Speaker of the House John Boehner promises there will be no default. The risk of one by miscalculation, however, remains, because so far he will not schedule a vote so the overwhelming majority of representatives in both parties could raise the debt ceiling and the government could resume normal operations.

If he allows such a bipartisan vote, the minority of tea partyers in his caucus may move to oust him as speaker. The question Boehner must face is whether he has the courage to fall on this political sword for the good of the country.

So instead of a clean vote on government debt and spending, this week we watched the absurd political theater of temporary fixes — in effect, kicking the proverbial can down the road until January. This is hardly a sign of economic, fiscal or even political prudence; it just means a revival of this awful drama next year on Capitol Hill.

China's best friends

Such short-term thinking — and its corrosive effects — may be with us for years. Because of the rules under which congressional districts are drawn, many of the tea party House Republicans are safe until the next redistricting takes effect with the 2022 elections.

These members owe their seats to several factors, but the most lasting is the rigging of elections by gerrymandering districts. That the Republicans control the House is not the product of majority will: In 2012 the Democrats overall won 1.4 million more votes than Republicans. Rather, it is the product of state legislatures controlled by Republicans corralling large majorities of Democratic voters into heavily blue districts.

Here is what political gamesmanship that erodes trust in the dollar and U.S. commitment to meet its debt obligations may lead to in the long term: the dollar's being matched or even replaced as a reserve currency trusted everywhere.

Given Beijing's ambitions to become the dominant global economic player, the Republicans run the risk that years from now, their party will be viewed as the best friends the Chinese communist rulers ever had, especially if tea party antics result in the yuan supplanting the dollar as the one currency everyone can trust.

Opinions expressed here do not necessarily reflect those of Al Jazeera America.

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