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14 Oct, 2013 03:53

US government shutdown threatens disruptions to global credit

This week, the US may be forced to default on its $16.8 trillion debt if a deal to raise the ceiling is not struck. And some US legislators are acting “irrationally” enough to indeed allow it to happen, Professor Jeffrey Sommers told RT.

If the US defaults on its debt, the entire global economy could be hit, IMF chief Christine Lagarde warned over the weekend. "We would be at risk of tipping, yet again, into recession."

Both the Senate and House are scheduled to be in session on Monday to try and strike a deal and bring an end to the two-week-long fiscal crisis.

RT:If the government shutdown leads to a default on the US debt, what could be the effects of that?

Jeffrey Sommers: The most dangerous aspect of this is that it affects the US credit rating. And the US of course is the economy that lives on global credit and the foreign purchase of its treasury bill. So this puts it in a very precarious position moving forward in terms of its ability to fund many of its programs domestically.

RT:Looking at the ways things stand right now, how likely is the US will get to the situation where there will be a default?

JS: It is very difficult to tell. There are significant pressures of course working to insure that we do not cross that threshold.

However one has to say that the Tea Party has acted very irrationally at times so it is rather difficult to say whether or not they can be curbed by more modern elements or what I should say more realpolitik elements within the republican party. Certainly that effort is already underway. The Koch brothers, figures like Paul Ryan, very big new players like Scott Walker in Wisconsin Republican Party have all tried to bring an end to this impasse and to have us not cross that threshold.

RT:Do you think the backers of the Tea Party have created a Frankenstein monster, something that is outside their control? They funded the Tea Party but they did not realized that there is all this other baggage that would come with it. This very strong anti-government sense?

JS: They have unleashed, in the most pejorative sense of this term, these popular elements that have brought the torches and pitchforks and they are rather difficult to control as it turns out. My guess is that they will be reigned it, but it’s proven far more difficult than the Koch brothers and their organizations such as ALEC had anticipated.

AFP Photo / Jewel Samad

RT:Leaders from around the world are sounding nervous about the stand-off - what would be the consequences for the global economy?

JS: This is all very unsettling for the global credit markets and in particular for countries like the UK for which finance is so important. So for those countries in which finance is a very, very big player in their economies, they are very, very nervous.

But really for all economies this is very troubling because it threatens disruptions to global credit which then impacts demand on the economy which even for economies which are more manufacturing-based ultimately results in loss of sales for them. So yes, everyone wants this to end.

RT:China is already calling for the creation of an international reserve currency to replace the dollar. How could the current situation impact US international ties?

JS: I think it gives further fuel to that move and of course China has been trying to see if they can coordinate a new order which would be less dollar based. We have China which is importing more and more of its oil, more of it of course directly from Russia as well as plans to import more natural gas.

My guess is that there is going to be more pushes by China for bilateral trade agreements that would just bypass the dollar all together. And that is going to get more difficult for the US in terms of funding its social obligations at home.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.