While the US Congress may be on verge of compromise, the damage to the US economically and global standing may have already been inflicted. Merely the willingness of such a large and dogmatic minority to “play chicken” has made those holding US Treasuries and/or investing in US denominated assets reconsider the seriousness of US political leaders and commitment to the Dollar and US credit standing. China has already been seeking to elevate an alternative to the US $ as reserve currency, more for political than economic reasons, presumably to weaken US global supremacy. (China’s media has labeled the US Congress’ debate over austerity as “playing chicken”). The damage may be less discernible with more traditional US allies and holders of US debt and assets (as Japan and Arab Gulf oil producers – believed to have almost trillion of US Treasuries and even more in other US investments). The US from their perspective has acted irresponsibly. The past month or so have been seen as a game of Russian roulette between the two major US political parties. Suffocating the Baby to Blame the Other Parent: Curbing deficits and austerity in US budgets is perceived by much of the remainder of the globe as welcome. However, they wonder if the efforts are serious or the intended results sustainable. Suffocating the baby to stress that it is having trouble breathing is perceived as type of abuse of the US Dollar and economy by two parents more bent on each other’s anguish rather than the welfare of the child entrusted to their care. Whoever prevails in making the other look worse, both look irresponsible and bad enough not to be trusted. Further, the medicine promoted primarily by some Republicans seems unrealistic and ideologically grounded rather than based upon sound fiscal/economic policy. Curbing spending is part of the solution, but timing may be ill conceived as the US and globe is still on periphery of falling back into recession. Some perceive the US placing itself into Greece’s dilemma even as it is certainly nowhere in the same situation. Cutting Income of Poor Rather than Rich More Direct Impact on Economy: Effectively raising taxes on the rich would also curb economic growth; however dollar for dollar the negative effect on economic activity is much more direct and immediate in reducing the spending power of those who have less, simply because the poorer spend practically every dollar that they have and into the US economy. Thus, curbing spending upon the poor, the elderly, the most vulnerable while not raising taxes upon the richer in society is an odd and counter effective remedy from the perspective of most international policy analysts. The rich may or may not curb their spending with higher taxes, but a retired or poor person will spend directly less in relation with how much less they have in income under austerity measures. Less Confidence that US Political System Functions Consistently with Economic Logic: In the end though, most international investors and economists will not be too concerned with the social consequences upon America’s most poor, elderly, vulnerable. However, they will take note of how fundamental economic laws are turned upside down to serve political rhetoric in satisfying narrow political constituencies. They will take note that US political leaders as a whole may fear raising taxes or even closing loopholes on the richest. They will perceive this both as a change in trend away from more progressive economic and social policies as well as less flexibility if there truly comes a broad and urgent need to increase tax revenues from those who could most readily carry the burden. The "Compromise" is a Deferral of Same Problem & Issues: The proposed “compromise” to the stalemate incorporates a Congressional committee to resolve how the budget deficit and spending is to be cut. It is not a solution but another deferral. At first blush it appears a reasonable solution, maybe even the only one possible now. However, the impasse is going to continue reappearing – there is no agreement on how much, from where. Republicans will draw a line in the sand blocking any “new revenues.” And, there are not so favorable precedents. Only in the last year or so, a previous bi-partisan committee, ("The National Commission on Fiscal Responsibility & Reform" or "Bowles/Simpson Commission" - PHOTO ABOVE). established to address the same considerations, only to have its balanced and reasonable proposals ignored, even without Congressional vote. While the new “committee” is intended to have more teeth, it is even less likely in the context of the evolution of the current debate to reach resolution. The Damage: Regardless of the just announced "compromise" or deal the US has already been damaged by: • Uncertainty in finance is a cost even if it appears merely as risk – the US economy has already suffered a significant drag as a consequence of the debate and overbearing uncertainty created. • Most will perceive US austerity efforts as not being well directed. While unfairness in the dolling out of tax benefits and program cuts may be at the top of debate among Americans, much of the globe will see this as curtailing the spending capacity of most ordinary Americans (again particularly lower working, elderly and vulnerable) and thus unduly impacting US economic activity as a whole. • The reluctance to “increase revenues” by accessing taxes with respect to those who are most capable to bear the burden indicates a significant shift in political will and loss of flexibility with respect to future austerity policies that may become necessary to preserves United States creditworthiness. President Obama may appear more as a leader without the stomach for the brawl politically even as the US is scarred by the rumble. • Returning to the international image of the US Dollar, economy and politics, the picture is not flattering. When it comes to floating currencies and investments largely unbounded by borders, the image may be the most important ingredient to reality. Image & Alternatives: It may take some time though for all the damage to become evident. There is no designated set of fight judges, not even the rating agencies can speak on behalf of millions of institutional and individual investors. Most redeeming for the US Dollar, the alternative, another global reserve currency, is limited. The Eurozone is troubled by even more substantive, structural problems. China is neither prepared to offer its currency as an alternative or would such be broadly trusted and accepted. The Swiss Franc or even British Pound are too small in circulation. Gold is difficult to carry in the wallet. Everything else has even greater deficiencies. The US Dollar may not be the most attractive option, but for now the only – however that is not likely to persist over the next decade. LAST RELATED ARTICLE – “ Mao’s Cultural Revolution Reincarnates in Washington” - diplomaticallyincorrect.org/films/blog_post/maos-cultural-revolution-reincarnates-in-washington-by-ambassador-mo/32696 Related Reports at “International Financial Crisis Channel” - diplomaticallyincorrect.org/c/international-financial-crisis




 By Ambassador Muhamed Sacirbey




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