A SUPERPOWER AT RISK OF SLIPPAGE / THE FINANCIAL TIMES EDITORIAL

October 25, 2013 6:19 pm

 

A superpower at risk of slippage

 

The dollar still reigns but underlying confidence is shaken

 

 

It has been 10 days since the US government shutdown came to an end. And if the bond market were your guide, there would appear to be no lasting costs – the 10-year US Treasury yield dipped below 2.5 per cent this week for the first time since August.

 

Yet beneath the surface, Washington’s flirtation with a voluntary default has shaken confidence in American political institutions. There may be no immediate rival to the dollar as the world’s reserve currency.

 

Markets are more preoccupied by prospects of a delay to the Federal Reserve’s tapering plans. But as John Kerry, US secretary of state, said this week, the world is now monitoring the US to see when it will recover its senses. It cannot afford to make a habit of political recklessness.

 

The fact that Washington is undergoing a crisis of will, rather than ability, is not particularly reassuring. There is no question that the Treasury’s has capacity to service US obligations. At about 75 per cent of gross domestic product, publicly held US debt is entirely manageable – and less than a third of that of Japan. And the US fiscal deficit is on course to drop below 4 per cent of GDP next year.

But the possibility that it may generate yet another fiscal showdown as soon as January or February is on everyone’s minds. Last week a senior Chinese official called on the world to “de-Americanise”.

Neither the Chinese renminbi nor the euro are in a position to supplant the US dollar, which still accounts for more than 60 per cent of global reserves. But governments and private investors are far more alert to possible alternatives than before. History is littered with solid objects – and riskless assets – that have melted into thin air.

There are two further costs to America’s rumbling domestic crisis that are equally hard to measure. As Einstein once quipped, not everything that counts can be counted. The first is to America’s reputation. Bill Clinton observed that the US should lead by the power of its example, rather than the example of its power.

By that yardstick, the US is floundering. Behind confidence in the full faith and credit of the US lies global trust in US democracy. However, the international impact of Washington’s dysfunction is increasingly tangible. Last month China exploited President Barack Obama’s absence from Asian trade meetings to launch a non-US initiative of its own. And the US government shutdown delayed the critical second round of transatlantic trade talks. Many important bureaucratic functions were put on ice, including monitoring of financial sanctions on Iran and work on fundamental scientific research. As Mr Kerry pointed out, he “could feel and breathe” the world’s doubts about US democracy in his meetings with counterparts.

Second, the shutdown has further sapped confidence in the US recovery. Last week the delayed jobs figures for September showed that the US labour market looks once again to be stalling. US consumer confidence also dipped to its lowest level in almost a year. And the shutdown has shaved at least 0.25 per cent from US fourth-quarter growth forecasts.

The world continues to hang on every word of the Fed, which remains the only functional economic game in town. The chances are that it will delay tapering until March after Janet Yellen, the nominee to replace Ben Bernanke, has taken over.

Assuming Capitol Hill does not block her confirmation, Ms Yellen will quickly need to show she is in the driving seat. It would therefore be a great help to her – and to a warily observant world – if Congress could keep the car on the road between now and then.

There is more at stake here than mere reputation. The status of superpower carries responsibility too.

 

Copyright The Financial Times Limited 2013.