2011年4月14日星期四

Aquila: Drop the brinksmanship

By Frank Aquila

Last autumn's election operated a well of distrust public big government that had been built for decades. With a wave almost unprecedented fervor anti-incumbent, long-standing service of Senators and representatives lost his re-election bid. Several powerful incumbents did not even survive their party primaries.

Republicans took control of the House of representatives and poached a significant number of seats in the Senate and several governorates. The party has also taken control more legislatures to state that he had performed since the great depression.

The order of the day for most of the 2010 candidates was the same: reducing government spending and stimulate the economy. While the favourites "tea party" received much of the attention, moderate Democratic Rep. Gabby Giffords (D - Arizona) to Senator Joe Manchin (D - w.) (In Virginia). also formulated a message "reduce government spending." Slashing the federal budget and debt of the U.S. have been the objectives; closures of Government and a refusal to raise the debt ceiling are the levers to achieve.

In the session of the Congress of duck lame after the election, Democrats in the White House and Congress, the public mood, remote sensing acquiescence quickly to Republican claims that the "Bush tax cuts" be extended. Neither side declared victory. On the contrary, critics on the left and the right felt betrayed by their leadership. Leadership on both sides promised their base that they would achieve more in tax battles coming.

Now that Congress has struck an agreement to reduce the $ 38 billion in 2011 federal budget, attention quickly turned to the need to raise the federal debt ceiling. While the debt ceiling is much debated, the question is not well understood. Many Americans believe that Uncle Sam can simply print dollars. That is not the case. Where federal spending exceeds income, the U.S. Government must borrow the difference. The total amount that the Government can borrow is defined by the Act. The limit on the Government to borrow, the so-called "debt ceiling", is currently set at $ 14.3 billion.

This limit could be achieved within weeks.

The leaders of the Congress can be even more reluctant to accept compromises in the battle just to raise the debt ceiling. President Barrack Obama urged to raise the ceiling of the debt without conditions. Critics of the President can point to Obama 2006 vote then Senator against raising the ceiling of the debt as evidence that this issue has always been somewhat politicized. But a reluctance to seek a bipartisan approach to the debt ceiling could be good for political parties, but it is clearly bad policy.

Understand how the debate on the increase in the debt ceiling could affect the U.S. economy, to understand the basis of American economic power. Since the second world war, the United States enjoys unprecedented global economic domination. Today - and for several decades to come - the United States is the largest economy in the world. Some time in the first half of the 20th century, the gross domestic product of China is likely to exceed the US GDP. Even when this happens, the per capita income us will be exceed China's per capita income.

The other pillar of the economic strength us is the US dollar, currency reserve in the world for a long time. As owner of the world reserve currency - essentially that all central banks must hold - at the United States is able to borrow in dollars rather than in another currency. For a nation with more than 14 billion national debt, the ability to borrow in our own currency is a huge advantage and privilege.

If the Federal Government should be able to borrow more money, public spending will slow down essentially to a handful. Cash raised through taxes should be used to provide essential services. In all likelihood, the Government of the United States would be unable to pay its debt. While such a failure of the federal debt would have applauded in some quarters, he would send shockwaves through global financial markets. Markets recover but would be detrimental to unique global status of the dollar, the U.S. AAA credit rating and the economy of the United States.

Loss of confidence in the dollar would have profound, negative consequences for the US economy. JPMorgan Chase (JPM) Chief Executive Jamie Dimon, echoing the feeling of the global financial community, said that the United States were to default on its debt, the consequences would be "catastrophic and unpredictable." The dollar would quickly lose its reserve currency status and therefore, all the benefits that brings to the American economy. It would cost the Government of the United States more to borrow, putting more pressure on Washington to cut payments and raise taxes. In addition, the Americans would pay more for imports of oil of clothing for consumer electronics.

The Federal Government has to reduce the deficit? Of course. The growth in the US deficit and the debt is not sustainable. Congress and the White House need to make difficult decisions, even if this means that they could be labelled as "dollar" and the "moderates" by extremists of the part.

These difficult decisions must be made in the debate on the budget, rather than confrontation to raise the debt ceiling. Otherwise, it may bring momentary pleasure, but the long-term consequences could be disastrous.

Aquila is a partner in the mergers & Acquisitions Group of Sullivan & Cromwell LLP.

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