As 450,000 “non-essential” workers continue to sit at home due to the government shutdown, the October 17th Debt Ceiling deadline rapidly approaches. With Congress utterly gridlocked, it is hardly news that the domestic picture is bleak.
However, it is also important to understand how these policy decisions (or in this case, lack thereof) impact global diplomacy and finance. Consequences of the government shutdown have already become apparent, and it is clear they will only increase in severity with time.
Representing U.S. Interests Abroad
In the short term, U.S foreign policy initiatives have suffered a number of setbacks because of the shutdown. Given President Obama’s recent shift in focus to the Pacific region, his absence has been particularly noted at the Asia-Pacific Economic Cooperative, or APEC. This yearly conference of 21 Pacific countries, including the United States, China, Russia, and Japan, is one of the most important meetings of the year because the 21 countries represented account for nearly 3 billion people and half of the world’s GDP. However the crisis at home has forced the President to place important aspects of his international agenda on hold. As such, important meetings with President Xi of China and Russian President Vladimir Putin on intellectual property rights, trade, and the Syrian crisis have been cancelled.
Perhaps more importantly, President Obama has also squandered a critical chance to push for the Trans-Pacific Partnership, or TPP. This free trade agreement would be the largest trade pact in U.S. history, encompassing 12 Pacific countries with a combined yearly output of nearly $28 trillion dollars. However, support for the partnership is lukewarm, and the absence of President Obama may be a significant blow to the Obama administration’s effort to finalize the partnership by the end of the year.
Speaking of trade, negotiations between the U.S. and the European Union to create an even larger trade pact than the TPP have also stalled because of the shutdown. Like many other sectors of government, the office of the U.S. Trade Representative has been gutted by the furlough, leaving the office incapable of further negotiations. Coupled with the uncertainty of the debt ceiling crisis, E.U. officials have also expressed hesitations with proceeding further.
With “non-essential” workers currently furloughed, the Office of Foreign Control – responsible for enforcing sanctions – has been left “completely, virtually utterly depleted”. Sanctions, which are our primary means of deterrence in Syria and Iran, are also used against drug cartels, terrorist organizations, and Weapons of Mass Destruction (WMD) proliferators. The inability to enforce sanctions may prove especially detrimental in Iran where heavy economic sanctions have been credited by many experts as the impetus for renewed negotiations with recently elected President Rouhani.
Deemed an “essential” aspect of national security, embassies continue to function. However, recommendations posed after Benghazi will be delayed. The plan, which adds nearly 1000 Marines and nearly 150 Diplomatic Security Service agents across embassies worldwide, is at a standstill because of the inability to train these agents. Given the political uproar after the deadly attacks that killed Ambassador Chris Stevens and three others, it is particularly ironic that embassies remain insecure because of the government shutdown. In addition, future increases in the security budget are now also in jeopardy.
Global Financial Markets
Understanding the link between global financial markets and the government shutdown, and on a larger scale, the debt ceiling crisis, requires dabbling into the world of treasury bonds and interest rates. For a more complete analysis, VPR’s own Greg Bernstein explains here. In brief, the reason we have weathered this crisis as well as we have is because we are essentially the world’s reserve currency. The world trusts us, so they let us borrow cheaply—i.e. borrow with low interest rates.
Things, however, are changing. As of Wednesday, the interest rate on bills set to mature on October 17th had surged from .03% to .48%, the highest levels since 2008. Such increases signal uncertainty about the debt ceiling impasse not just in the domestic market, but also in global markets. If we were to breach the debt ceiling, or default, the costs could be disastrous. As ominously stated by the Treasury Department, “credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.” Yes, it is mildly apocalyptic, but the scary thing is that it could actually happen.
With the IMF revising their economic outlook for the year, it’s clear that 2013 will not be a good year. Global growth is now projected at only 2.9%, down from 3.2% earlier in the year. The United States is limping along well below the global average at 1.6% (well below the more desired 2-3% range). However, an important aside by the researchers indicates that these numbers are based on a short-lived government shutdown and a compromise reached on the debt ceiling. In addition, future policy decisions made by newly appointed Federal Reserve Chairwoman Janet Yellen on the $85 billion dollar bond buying program popularly known as quantitative easing will play integral roles in determining future growth and market stability.
Putting it All in Perspective
It is important to note that many of the above effects are reversible, short term, or preventable. The U.S. remains a dominant global economic and diplomatic power, and the long term outlook for Treasury bonds has been mostly stable. However, for how long it remains so is dependent on how quickly Congress resolves its differences. That means ending the government shutdown, addressing the debt ceiling crisis, and compromising on a sensible approach to prevent such crises in the future.
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