It’s the economy, stupid.
Way back in the early 90’s, Bill Clinton’s legendary political consultant James Carville coined this phrase to crystallize what all the research and focus groups were telling them about the issues which would decide the election.
In every election since, the phrase has been rolled out to remind politicians that no matter what special concerns and interests they may prefer to be top of mind for voters, it’s still the economy, stupid.
This week, the Republicans have doubled down on this truism in a way which could change the way America is governed for generations to come.
The US economy is, undoubtedly, the key global financial barometer. When America sneezes, everyone catches a cold, and the dollar remains central to it all as the world’s reserve currency.
But America’s economy is one largely based on debt and borrowing and the belief that the world’s leading economy will always be that.
The fact is, to retain its place at the top of the league, the American government spends way more than it earns through taxes, and has done for decades. To make up for the shortfall it borrows money through the issuing of US government bonds, seen as probably the world’s safest investments.
Every few years, the amount the previous government said was the absolute maximum the country would every rack up in debt gets surpassed, and the debt ceiling needs to be increased.
The idea of the debt ceiling was introduced just before the Second World War, and it has been elevated more than 100 times since. Typically, Congress recognises the collective need to do this and acts in a non-partisan way with little in the way of standoff other than a bit of the usual points scoring here and there.
But as the country has become more bitterly polarised as red or blue, liberal or conservative, black or white, lawmakers this time decided to use the debt ceiling vote as a way to leverage other issues.
This week, the U.S. Government needed to push the limit up to $31.4tr from $28.9tr, allowing a further $2.5tr of borrowing, largely to pay for the COVID payments, tax cuts and policies incurred by the previous President, Donald J. Trump.
Senate majority leader Chuck Schumer (D-NY) reached out to the minority leader Mitch McConnell (R-KY) to make the necessary arrangements but found the Republican senator uncooperative.
Senate Republicans are a prickly bunch. Some are seasoned Capitol Hill operators, born into politics and comfortable with the ways of bi-partisan deals, others came with the Trump movement and, like their beloved deposed leader, believe that any compromise is tantamount to selling out to the Democrats – political treason.
This leaves Mitch McConnell in a tricky situation. He must find a balance between a dogma which will crash the nation’s economy and retaining the support of the hard-line militant Trump wing for whom insurrection and overthrow of the status quo is the goal.
Republicans now say raising the debt limit is the “sole responsibility” of Democrats because they hold power in the White House and both chambers of Congress.
They are angered by new spending proposals the Democrats are trying to push through without Republican support, through a procedural tool called “budget reconciliation”.
Mr McConnell and other Republican grandees contend that if Democrats can use reconciliation to achieve their economic policy goals, they can also use it to raise the debt ceiling and, therefore, the Republicans are absolved of any involvement, fingerprint free borrowing.
But if the debt limit isn’t raised, America will be short of the necessary readies to pay its bills and runs the risk of defaulting on the loan payments for all those treasury bonds it has issued.
A recent Goldman Sachs report said in the case of a default, the US Treasury would need to stop 40% of payments and financial aid to US households. The military were worried too, The Pentagon released a statement expressing its concern that service members may not be paid in full or on time.
Such an event would cause delays or adjustments to every single government programme, while also affecting federal funding which many individual states rely upon.
Default would also trigger a spike in interest rates and ruin America’s creditworthiness, making the US a more expensive place to live and damaging the economy.
That would also bring turmoil to the stock market.
Investors around the world could sell off US assets and become less comfortable with the U.S. dollar for pricing commodities. Worried by the growing politicization of running the global economy, the International Monetary Fund called for an end to Washington’s “counterproductive brinkmanship” over the debt ceiling. It suggested the cap should be replaced with an alternative financial mechanism.
Luckily, calmer voices have prevailed, and this week an agreement was reached. The catastrophe of this tsunami of debt threatening to ruin the global economy was avoided, but it isn’t without consequences.
Mitch McConnell’s leadership of the Republican minority in Congress is seriously under threat as Trump, his followers, and the Fox News Network look to depose him.
The political games have stock watchers and bond dealers nervously hovering their finger over the ‘sell’ button, just as the economy needs a stiff shot of confidence as COVID cases are on the rise.
And on the international stage, China will have been watching and wondering when or if it should act to inflict maximum distress and embarrassment to the Americans, especially as it is smarting from the US decision to break off diplomatic ties during the Winter Olympics in Beijing. And if China did make a move, it could reset global economics at a stroke – after all, who do you think has been buying those U.S. treasury bonds for all those years?