China frets as US counts debt fallout
A sombre Barack Obama, framed by a portrait of Abraham Lincoln in the White House's State Dining Room, didn't sugar-coat it when he described the impact of the debt default saga on the US.
While his Republican foes had capitulated, the 11th-hour backdown to allow the world's biggest economy to repay its debt and avoid its first default since 1790 had imperilled the superpower.
"Probably nothing has done more damage to America's credibility in the world, our standing with other countries, than the spectacle that we've seen these past several weeks," Obama told Americans in a nationally televised address.
"It's encouraged enemies, it's emboldened our competitors and depressed our friends, who look to us for steady leadership."
Economic armageddon may indeed have been avoided when the House of Representatives passed an increase in the debt ceiling on Thursday, but the deal runs out in February, and this has been the second time in as many years that the global financial system has been taken to the brink.
"This is a matter that's going to take a long time to resolve," Australian Treasurer Joe Hockey told Fairfax Media. "Essentially, they are just kicking the can further down the road."
This is a crisis that remains unresolved. Its genesis lies in the very nature of the US political system. The impact is on its economy, the ultimate source of US power. For many, it is another signpost, this time flashing neon, pointing the way to US decline.
Certainly, its great rival - and economic partner - China is mightily unimpressed, even as it flexes its muscles. A commentary carried by China's official news agency Xinhua, argued it was time "for the befuddled world to start considering building a de-Americanised world", including finding a new international reserve currency.
The rhetoric was understandable: a debt default could well have decimated the value of China's $1.28 trillion in US Treasury holdings.
US government debt anchors the global financial system, the supposedly risk-free asset that many other securities are priced off. It is the lifeblood of the global banking system, a unique gift and responsibility for the US almost unprecedented in economic history.
No one knows exactly what would happen in the event of a default. The US would have the capacity to repay debt, just not the legal authority to do so. Financial traders may have given the US government grace, not least because they had no alternative.
The worst-case scenario - entirely plausible - is that the entire global financial system would seize up. Interest rates would soar, the US dollar plummet and, in the event of any downgrade in the US sovereign rating, traders forced by computer systems to dump US treasuries en masse.
Debt default was the financial equivalent of a nuclear bomb, opined billionaire investor Warren Buffett. The US Treasury Department said there would be "catastrophic economic consequences".
For China, it's a reprise of the acute anxiety generated by the global financial crisis that reverberated out of Wall Street after loose lending to US home buyers. To use the belligerent cadence of the Xinhua article: "The world is still crawling its way out of economic disaster thanks to the voracious Wall Street elites."
Australian National University professor of strategic studies Hugh White said that, when it came to the contest between the great powers of the US and China, the ructions of the GFC were a game changer.
Ever since, the US has made a series of missteps, culminating in this week's fiasco on Capitol Hill. "Before 2009 China was biding its time, then with the GFC it decided its time had come, and it started pushing America much harder," White said.
China pranged the Copenhagen climate-change talks and has asserted its territorial ambitions in the South China Sea and East China Sea to the chagrin of the Philippines and Japan.
Obama's Asia "pivot" - announced on the floor of the Australian Parliament in 2011 - was introduced with strident rhetoric that alarmed China and the region, White said. "The Chinese have pushed back and the US has backed off," he said.
"It's changed from a 'pivot' to a 'rebalance', and now they are not even sure if it's a rebalance ... If you are changing the name of a policy after it's launched, you know something has gone wrong"
New US Secretary of State John Kerry has been getting underwhelming reviews, not least in Asia. Kerry is being compared unfavourably to Hillary Clinton and Obama's competence is being questioned.
That the debt ceiling debate and the shutdown of the US government this month occurred against the backdrop of Asia's key summits, the Asia-Pacific Economic Co-operation forum and the East Asia Summit, reinforced a power shift under way to China.
Obama's absence and his country's financial woes were keenly noted as China announced big investment deals with Asian countries and the US free-trade proposal foundered and China's alternative gained traction.
China's military might is growing too. It is deploying forces far beyond its coastal waters and challenging its neighbours and intimidating their fishing fleets. According to a Reuters report, Chinese shipyards are turning out new nuclear and conventional submarines, destroyers, missile-armed patrol boats and surface ships at a higher rate than any other country.
The economic travails of the US undermine its ability to engage in any arms race with China, and make it less able to engage in any overseas deployment that would sap its financial reserves.
The Congressional brinkmanship and the shutdown in government services has also taken its toll on US soft power.
"This has a tremendous impact on how we're perceived abroad, as well, and it undermines our efforts to promote democratic reforms," US State Department spokeswoman Jen Psaki said.
"The question we have is, how can we expect our diplomats overseas to entice governments to embrace our values when we can't keep our own doors open."
Many also believe there will be increased pressure for the US to forgo its central role in the financial system.
Renewed calls in China for an alternative reserve currency to the greenback will likely grow louder, even if moving there is highly problematic.
Jin Canrong, a professor of international studies at Renmin University and a respected expert on American politics, said China had long sought to diversify its foreign-currency reserves. But with the US market for government bonds the largest and most liquid in the world, it had not found a better alternative.
"We have talked about it for many years, for at least 10 years since entering the [World Trade Organisation]. But, in fact, most of China's foreign-currency reserves are still in US dollars.
"Since the late 1980s, China has raised the idea of establishing a new world order, both politically and economically, but no one has any idea what that could be. China has been a beneficiary [of the existing world order], so why change it?"
Bank of America Merrill Lynch chief economist Saul Eslake said a realignment of the financial order was inevitable, with either the Chinese yuan or a basket of currencies replacing the US dollar. It just might take half a century.
He pointed out that the US became the world's biggest economy in the 1870s and didn't come to dominate the financial system until after World War II. If the US currency and bonds lose their primacy, analysts say a $100 billion benefit from lower interest rates will be lost to the US.
Obama's frustration is that the US economy is showing signs of rejuvenation, only to be sideswiped by the debt debacle. Economic growth is rising, jobs are being created and even the US budget deficit is falling.
The US Federal Reserve has adroitly managed the US emergence from the GFC, through its policy of "quantitative easing", also known as printing money, injecting funds into its banking system, lowering interest rates and restarting the housing sector.
Huge reserves of shale oil and gas have prompted talk of a decoupling from Middle East oil and lower energy prices.
Eslake noted that the economic interdependency of China and the US was a powerful incentive for co-operation between the giant powers.
China is reckoned to be quietly and consistently divesting from US treasuries, and parking its foreign reserves in other assets, including infrastructure and real estate in Western countries. But a rapid selloff of US treasuries by China would cripple the US, send the yuan soaring and deprive China of a vital export market.
This "mutually assured destruction" helps Obama, but an end to the immensely damaging episode will depend on a cessation of US political brawling.
The Republican retreat this week in Congress has been widely viewed as a scarifying defeat in the US.
The narrative that the party and its Tea Party wing held the nation - and the world - hostage in a mad attempt to cruel Obama's healthcare reforms has resonated. Polling is dreadful for the Republicans and there are upcoming mid-term congressional elections. It would suggest Obama has some political capital to play with.
Hockey, who was in Washington and New York this week said the "salient lesson" for Australia was to take control of its budget, reduce debt and refocus on growing markets in Asia. Asked about China's response, and the broader geopolitical fallout, Hockey repeated an observation he had made to plenty of politicians, bankers and officials in the US.
"Washington is like being in a home where mum and dad are constantly fighting. The danger is, if it goes on, a time will come when the kids will be looking for another home, they look at moving into the home across the road."