“An August panic similar to those in 2007 and 2008 no longer appears far-fetched. Only this time, the global economy is far less well-equipped to cope...
“Another leg of the economic crisis which started in 2007 is a distinct possibility – and exchequers simply do not have the fire-power to offset another private sector panic”.
That is how the Financial Times summed it up (18 July), under the headline: “The abyss that awaits”.
One factor is the spread of the eurozone crisis to Italy. The other is the prospect that the US government will run out of cash on 2 August.
The US government, unlike other major states, has a legal limit on its borrowing, currently $14,300 billion. All modern capitalist economies require large and liquid markets in government debt to function; so the debt rises with the general rise in economic output and inflation; and Congress often has to re-set the limit. A hundred times so far, over the years.
The Republicans refuse to raise the limit unless President Obama and the Democrat majority in the Senate agree to cut the US budget deficit exclusively through spending cuts, with no tax rises. Obama has gone a long way towards the Republicans, but they still refuse to make a deal.
Many “Tea Party” Republicans do not want a deal at all.
They want the US government to run out of cash, and be dealt a shock that will force more radical spending cuts.
This attitude, like the very existence of the legal borrowing limit, reflects the pressure of small-town USA (only 28% of the US population lives in cities bigger than 100,000, whereas nearly 60% of the UK population does).
If no deal is reached by 2 August, the first step is for the federal government to lay off all “non-essential” government workers and shut down all “non-essential services”, as it did from 14 to 19 November 1995 and from 16 December 1995 to 6 January 1996.
That shutdown came from a standoff between President Clinton and a Republican majority in Congress over budget cuts wanted by the Republicans. But it came at a time when the US capitalist economy was in good shape overall.
Today, large-scale federal government lay-offs could tip a very sickly US economy into renewed full-scale slump.
A prolonged impasse could lead to the US government failing to make payments due on previous borrowings — “defaulting”.
The effects would be huge. For decades, for governments and corporations worldwide, US government debt has been the safest form of holding wealth. For that reason, in the crisis since 2007-8, despite all the US economy’s turmoil, purchases of US government debt have increased, not fallen.
The price of gold has risen above $1600 an ounce for the first time, with rich people thinking gold is safer than dollars. But there is just not enough gold to be world money at the present scale of the world market.
A collapse of the dollar would mean chaos in international trade.
• The 1995-6 shutdowns: bit.ly/eT60Vy