America is fucked

As you probably know, the USA is teetering on the brink of bringing down the global economy. This is because the US government has, for many, many years, been spending more than it brings in in taxes. However, the US has something called a debt ceiling and no government is allowed to increase the national debt beyond the debt ceiling without getting the approval of Congress. So, in order for the US government to keep on borrowing the money it needs to pay its bills and creditors, Congress needs to vote to raise the debt ceiling.

Now here's where the problem starts. Congress is controlled by the "fiscally conservative" Republicans who are running scared of the fanatical Tea Party movement. But the President is a Democrat.

Now, in order for the debt ceiling to be raised, all sides are insisting on a deficit reduction strategy. The basic problem is that the Republicans are refusing to raise the debt ceiling unless the defence budget is protected from cuts, taxes are kept low and there are cuts to welfare programmes. And they're only willing to raise the debt ceiling enough for the government to function for the next six months - meaning that the whole issue will blow up again at the same time that Obama is facing the presidential election.

Now the problem is that a deficit reduction strategy based purely on cuts with not tax rises is impossible. The US has tax rates which amount to just over 15% of GDP whilst pretty much every other developed country in the world has taxes at 40% of GDP or more. And this tax rate is also somehow meant to pay for the largest and most bloated defence budget in the world, two foreign wars and all the other expenses at the same time as paying off the deficit. It's simply not possible.

That picture above comes from the New York Times. The reason I've put it in here is because it illustrates one of the biggest problems with the American financial situation. Back when Bush was president he introduced massive tax cuts for the wealthiest individuals and corporations which took taxation on them to the lowest for sixty years. These tax cuts were meant to stimulate growth and trickle down distribution of the new wealth generated. In practice none of this happened and the US was saddled with a debt from those tax cuts alone which amounts to more than all the borrowing Obama has done so far put together.

It's pretty basic. You can't maintain a level of spending as high as the US and keep on lowering taxes at the same time. Something has to give.

However, despite that, Obama agreed to a deal where there will be no tax rises and where the deficit will be reduced entirely through cuts to spending. So what's the problem? Well, the problem is that the Republicans don't think this is good enough. In addition to reducing the deficit entirely through cuts, they also want to make sure that none of the cuts fall on the defence budget (which, as I've already mentioned, is the largest and most bloated in the world) and that there are additional cuts to welfare - something which would completely undo all of what Obama feels he has achieved since becoming President.

So now we have a Mexican stand off. Both sides are playing the blame game whilst the US comes ever closer to the deadline where it will either have to default on its debt (something which would quite literally bring down the entire global economy) or shut down the federal government, something which would mean real hardship for millions of Americans.

To my mind, the Republicans really are to blame here. It is not possible for the US to pay of its debt without raising taxes even slightly. If it were any other country in the world, the markets would have downgraded America's credit rating already, effectively pulling the plug on their economy and turning them into another Greece. The only reason this hasn't happened yet is because the markets know that if they did so then they would crash the global economy.

But with the Republicans playing their game of brinkmanship it is highly likely that that could happen. And if it does then it doesn't matter who scores the political points because the entire financial system would utterly collapse, bringing a swift end not only to American hegemony, but also to the entire world as we know it.

And even if some eleventh hour compromise is reached it does not change the fact that America's political system and media will ensure that this problem keeps on emerging again and again and again. The US is hopelessly divided on partisan lines and not only does each side view the other as the ultimate enemy, each side also lives in a different reality to the other. As far as I can see it is the Republicans who are living in an economically illiterate fantasy land but that doesn't matter a jot because they have the political and media clout to have just as much of a say over decision making as the sane people.

So, to put it bluntly, America is fucked.