'How long can the biggest borrower remain the world's biggest power?'

Photo: Brand New Images

Larry Summers, President Obama's former chief economic adviser used to ask noting the massive deficit of the US: "How long can the biggest borrower remain the world's biggest power?"
It is not hubris or hostile action that brings the US down. It is a lack of readies, meaning unpaid, high-interest, foreign-owned debt, and an unaffordable lifestyle with credit-card debt of Americans.
With the latest borrowing, the United States joined a small group of countries whose public debt exceeds GDP, including Japan (229%), Greece (152%), Jamaica (137%), Lebanon (134%), Italy (120%), Ireland (114%) and Iceland (103%), according to figures provided by the International Monetary Fund.
For the first time, the United States' credit rating was cut when Standard and Poor's lowered it from triple-A to AA+, citing the country's looming deficit burden and weak policy-making process. The US has held the S&P rating triple A since 1941.
The downgrade has been a symbolic embarrassment for President Barack Obama and his administration, and would most likely lead to a spike in US interest rates, making debt payments pricier and hurting Americans holding flexible-rate loans -- anyone carrying credit-card debt, or seeking a car loan.
On August 2, US President Barack Obama signed an emergency austerity bill that averted a devastating debt default, but warns that the contentious plan was "just the first step" on a long road to economic recovery.
The measure lifts cash-strapped Washington's $14.3 trillion debt limit by up to $2.4 trillion while cutting at least $2.1 trillion in government spending over 10 years, a step forecast to drag down the already sluggish US growth.
The new law calls for more than $900 billion in cuts over the next 10 years -- $350 billion of it in defence -- and creates a special congressional committee tasked with coming up with another $1.5 trillion in cuts to report by November 23, with Congress voting by December 23.
Obama spoke on August 2 after the US Senate voted 74-26 to pass the measure -- which cleared the House of Representatives by a 269-161 margin on August 1 -- with just hours to spare before a midnight deadline that could have triggered a first-ever US default on its debt payments.
Obama's 2012 re-election bid will turn on voters' perception of his handling of the US economy, which has laboured under historically high unemployment above 9% as it struggles to recover from the global meltdown of 2008.
The president promised that the deficit-cutting would not starve education and research nor happen "too abruptly while the economy is still fragile," and railed against the "manufactured crisis" over the debt limit.
Republicans have promised that the spending cuts will create jobs, but top Wall Street economists have warned the austerity measures will actually be a drag on already sluggish US growth as government stimulus measures run out.
The overall shift from priming the US economy to government belt-tightening is expected to reduce US growth next year by about 1.5 percentage points, according to JP Morgan Chase economists.
Furthermore, the US economy, which grew at a feeble 1.3% in the second quarter of this year, much worse than economists had expected, is discouraging.
Obama indicated that he would campaign for raising tax revenue on the rich and wealthy corporations, a proposal that has already generated opposition from Republicans who contend it would smother job creation.
"I've said it before, I will say it again: we can't balance the budget on the backs of the very people who have borne the biggest brunt of this recession," he said. "Everyone's going to have to chip in. That's only fair."
Democrats, especially on the party's left flank, have expressed outrage that the bargain Obama struck with his Republican foes omitted any tax increase on the wealthy.
"It is my hope that we have reached the high tide of an ideological movement that has sought to hold tax cuts for the wealthy sacred, while imposing increasingly draconian cuts on American families," Democratic Senator Carl Levin, who voted for the bill, said. In a veiled swipe at President Obama, Senator Levin also stressed that "success also is going to require presidential leadership and stronger use of his bully pulpit."
The bitterness, division and dysfunction in the US Congress that reverberated around the world, dipping stocks and shares in many countries as the US veered toward default, have eroded the US's reputation as the world's economic haven and the sole country to lead the rest of the world out of financial crisis and recession. It reminds everyone that the US can no longer afford either a new Marshall Plans or new wars.
After the Second World War, America supplanted the ''old world'' and took control. The end of the Cold War entrenched its global grip. Now the wheel has turned -- and it is the US that is coming down with a bump.
Chronic American financial vulnerability carries increasingly serious implications for US global influence and its standing as the world's only superpower. In short, the deficit and the mindset that produces it are beginning to threaten the post-1945 security architecture.
Russian Prime Minister Vladimir Putin has accused the United States of living beyond its means "like a parasite" on the global economy and said dollar dominance was a threat to the financial markets.
"They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told the pro-Kremlin youth group Nashi, on August 1. "They are living like parasites off the global economy and their monopoly of the dollar," Putin said
Putin noted that Russia holds a large amount of US bonds and treasuries. "If over there [in America] there is a systemic malfunction, this will affect everyone. Countries like Russia and China hold a significant part of their reserves in American securities ... There should be other reserve currencies," Putin told the young Russians.
Finally, the austerity measures in the US may have an adverse effect on developing countries including Bangladesh as there are likely to be less governmental aid and imports as well as remittances from the US.

The writer is a former Bangladesh Ambassador to the UN, Geneva.