Breaking – Swoop & Al: Washington’s World: August 1st – 7th, 2011 – Debt, Deal & Consequences

Breaking – Swoop & Al: Washington’s World: August 1st – 7th, 2011 – Debt, Deal & Consequences
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Just a few minutes ago, President Obama announced that a deal was reached on the raise of the debt ceiling.

Reuters: “The plan involved a two-step process for reducing the U.S. deficit. The first phase calls for about $900 billion in spending cuts over the next decade and the next $1.5 trillion in savings must be found by a special congressional committee. Congress must act by December 23, 2011, under the deal”.

For more details on the Federal Debt structure, you may refer to a CQ’s post: Who Holds the Federal Debt

The deal is viewed by some commentators like Paul Krugman from the New York Times as a significant setback for the current administration and the democratic party as a whole.

NYT: “…the reported terms of the deal, which amount to an abject surrender on the part of the president. First, there will be big spending cuts, with no increase in revenue. Then a panel will make recommendations for further deficit reduction — and if these recommendations aren’t accepted, there will be more spending cuts. Republicans will supposedly have an incentive to make concessions the next time around, because defense spending will be among the areas cut. But the G.O.P. has just demonstrated its willingness to risk financial collapse unless it gets everything its most extreme members want. Why expect it to be more reasonable in the next round? ”

In the same newspaper, David E. Sanger’s Washington’s memo states that despite the deal, in World’s Eyes, Much Damage Is Already Done. Quoting Jeffrey Garten, a professor at the Yale School of Management and the author of several books about American power in the era of globalization, Sanger points out the lack of a growth strategy to restart the US economy.

NYT: “Even if the deal passes muster with the credit rating agencies, there is still a huge problem,” he said.  “The problem is that we need both a fiscal strategy and a growth strategy,” he said. “And what you hear around the world is that no one is convinced we do — that we have a pathway to making the debt sustainable and to dealing with everything from our infrastructure to our education system. It seems obvious to everyone that we haven’t done anything, but veer around to avoid catastrophe.”

On the US credit rating, things remain uncertain. As mentioned by the Wall Street Journal tonight: “Moody’s and Standard & Poor’s said they won’t immediately comment on U.S. debt deal, but even if the deal is passed, it falls short of S&P’s desire to see deficit cut of at least $4 trillion. Moody’s may affirm the U.S.’s Aaa rating, but could put the rating on negative outlook.”

For the remaining Washington news, let’s go through Swoop’s last post which highlights the impact of the debt turmoil on the US foreign policy. During the next months months, my posts will focus on the ways and means to restart the US economy. No matter how this crisis has showed the intense political tensions inside the US political systems, it’s a fact “There is no other country that can step in and replace the U.S. at the core of the system,” as stated by Mohamed El-Erian, the chief executive officer at Newport Beach, California-based Pacific Investment Management Co., which manages the world’s largest bond fund, said July 25 in an interview on Bloomberg Television. “The U.S. is the supplier of the reserve currency.”

Europe and the rest of the world have for the moment few lessons to give to the US when considering their own debt and economies.

Please note that Swoop’s post was prior the tonight’s deal on the increase of US the debt ceiling.

Swoop: “All Washington foreign policy commentary now risks repeating itself. For the third week, the deepening crisis over the debt limit is driving out any meaningful Presidential engagement in international affairs.

There is no advantage in speculating about the outcome. However, it is fair to note that whether a deal is reached or not, it will simply set the stage for future battles.

There will be no euphoria in Washington political circles, especially in the light of the statistical evidence of faltering economic recovery. All involved recognize that the intense ideological divisions that have marked this episode are here to stay. These will impact decision-making throughout the US government. Initiatives with international dimensions like financial reform under the Dodd-Frank Act, already under sustained criticism, will encounter fiercer resistance, throwing into doubt the prospects of harmonizing US and EU regulations.

Foreign affairs will not escape, as shown by current efforts in the House of Representatives to cut spending by the State Department and USAID. Larger cuts in the defense budget than those envisioned by former Defense Secretary Gates are now under discussion.

We predict that, once President Obama reengages in the foreign policy arena, he will find his authority challenged at every turn. This issue and his perceived handling of it have, for the moment, shifted power in Washington away from the executive to the legislative branch.  This will have meaningful impact on us foreign policy.

NSC officials tell us that Chinese criticism with regard to the debt ceiling debate has gone home with Obama as an indication of the work he will have to do to repair US international standing. These dynamics will constrain his freedom for maneuver both on relatively small-scale issues like Libya and on larger questions such as the Middle East peace process and the search for an endgame in Afghanistan.

Meanwhile, Secretary of State Clinton is seeking to play a weakened hand as vigorously as possible. She is fighting the cuts in State Department appropriations and is seeking new ground on old problems like North Korea. In the course of her recent extended trip to Asia, she has reaffirmed US commitment to the area, especially in terms of reassurance to US allies like Indonesia that the US sees a national interest in the sovereignty of the South China Sea.

The open question, however, now under discussion by many US foreign policy experts is whether, as suggested by the recent analysis by the Council on Foreign Relations, US prestige has suffered a long-term setback.”


Photo Credit: Capitol Storm By afagen / FlickR