Mohamed El-Erian: What Happens in Washington Affects Everyone
America's debt-ceiling debacle was a self-inflicted, homegrown crisis that President Obama righty warned could have sparked "a deep economic crisis — this one caused almost entirely by Washington." It was much more political than economic and financial. Yet as the smoke clears, both America and the global economy now have to deal with the economic and financial hangover.
Unlike Greece and other peripheral European economies, America does not have an immediate debt and deficit problem. Yes, the budget deficit is high, but there is ample funding available to the U.S. Treasury at extremely low interest rates. And yes, the national debt level is rising, but because of the special role that America plays at the core of the global financial system, the country has very patient creditors.
What America has is a medium-term challenge — a festering policy issue that was aggravated by the aggressive use of government resources in 2008 and 2009 to avert an economic depression following the disorderly collapse of investment bank Lehman Brothers.
A legislative anomaly — the need for President Obama to get congressional approval for both an annual budget and a maximum amount of debt issuance — transformed a slow-burning fuse into a grenade with its pin pulled and threatening to explode imminently. Political attempts to defuse this grenade exposed an extent of political dysfunction that has stunned many in America and abroad, and rightly so.
At the very last minute, this self-manufactured crisis was addressed through a messy compromise that has only a limited impact on the medium-term fiscal outlook. In the process, however, politicians have put at risk America's valuable AAA rating and inflicted damage on the American and global economies.
The debacle in Washington is a further hit to corporate, household and investor confidence. It will translate into lower U.S. economic growth, higher unemployment and more volatile and fragile financial markets.
With the U.S. at its core, the global financial system also faces considerable uncertainties. It is constructed (and operates) on the assumption that American politicians will safeguard the AAA status of U.S. Treasuries (long known as the global standard for a risk-free asset) and the related standing of the U.S. dollar as the global reserve currency.
None of these headwinds to economic well-being will die down anytime soon. Moreover, they come at a time when the Western world is already hobbled by structural impediments that undermine economic growth, intensify income and wealth inequalities, make the unemployment crisis more protracted and ensure that this isn't the U.S.'s last debt scare.
With President Obama's signature on Tuesday, Aug. 2, of compromise congressional legislation, American politicians finished the chapter on how they fabricated a crisis and inflicted unnecessary pain on the innocent. But their writing is far from over. Their new chapter is itled "How We Undermined the World's AAA Economic Anchor."
Mohamed El-Erian is the chief executive and co-chief investment officer of investment firm Pimco.