US debt crisis has to be solved by Congress 'that is basically run by children'
Westin, a Swedish economist and seasoned Moscow-based financial expert, says that given that we see political crisis appear in the US again and again, there will be more calls to try to reduce the rest of the world’s dependency on America.
RT:In your opinion, just how bad would a default be?
PW: A default would be a catastrophic event. You’d have an increase in the cost of borrowing around the globe. You’d have inflation in the US increasing on the back of a very sharply falling dollar. Basically, it would affect every single country in the world, given that the dollar remains the key reserve currency.
RT:Will the US make a last-minute decision and find an agreement to raise the debt ceiling?
PW: Well, I think they will have to, given that, as I said, it’s going to be a catastrophic event. The unfortunate issue is that you have a number of politicians on the Republican side, the so-called Tea Party, who actually believe that the US can actually handle a default – something which I think is very reckless and irresponsible. You’re looking at Congress that is basically run by children. The fortunate thing is that [the number of] people who believe that the default could be manageable is very tiny, but it’s the question of winning them over. The longer we drag on to the Oct. 17 deadline the more concerned the markets will be.
So far, we see a sort of calm sell-off. We’ve seen that markets for a couple of days have been actually going up on some belief that some solution will be found – which I think in the end will be found, because this would be a catastrophic event if we see a default.
RT:Why would lawmakers leave such a big decision until the last moment?
PW: Just because politicians have to solve their own problems. If you go back to 2007-08, we had a financial crisis which was solved by politicians coming together. This time we have a political crisis which has to be solved by politicians. And given that there is such a split along the party lines in the US and a very small fraction that holds the balance are determined not to give in, the negotiations are just continuing and people think that the longer we hold on to it, the quicker the other party will cave in. We started to see it to be the case. Unfortunately, the US population gets stuck in the middle.
RT:We have heard different calls from different countries, i.e. China, for the so-called de-Americanization of the world. But has anything changed since the crisis of 2008?
PW: As I’ve said the crisis of 2008 was a financial crisis that was successfully solved by politicians. This time there is a political crisis that has to be solved by politicians. That’s the real change. To actually de-Americanize, as they call it, if it is going to happen it is a very slow process. Given that we see time and time again this political crisis appear in the US, there will be more calls to try to reduce dependency on America – in the same way as America has been trying to reduce dependency on the Middle East for its oil. But it has to be a very slow and gradual process.
RT:Is any other single currency capable of replacing the US dollar in international transactions?
PW: In the near term, there is no real currency that can replace the dollar. The euro would be the best candidate. But if you look at other currencies people have been talking about – Chinese renminbi, even the Russian ruble – these currencies are not convertible. You’d also have to re-price into these currencies most commodities that are priced in dollars. So, there is no quick alternative to the dollar as we see it right now.
RT:The US doesn't actually have the highest debt-to-GDP in the world. Why are people losing faith then?
PW: In this case it’s not really about the level of debt, but about the ability to repay the debt they actually have. With the old ceiling, they can pay $30 billion. What they owe in 2017 is going to be $60 billion. So, basically, defaulting on this debt, or having to reduce spending elsewhere to find the money to pay the debt – any of these options would probably bring the US back into recession and therefore also have a ripple effect throughout the global economy.