The recent high-stakes bickering in Washington between Democrats and Republicans to resolve the government shutdown and to avoid a disastrous debt default has invited international contumely and contempt for America’s political system; disorder ruled in the US capital as the world’s financial system seemingly was brought to the brink of a catastrophe that might have rivaled 2008’s global financial crisis.
Not only was there acrimony between President Barack Obama and the Republican-controlled House of Representatives, a split within the Grand Old Party itself seemingly derailed the prospects of a long-term solution, even as a temporary way through the immediate impasse on lifting the $17.5 trillion debt ceiling emerged.
Certainly investors have reassessed their holdings of U.S. securities. If the U.S. government were ever to miss a payment, the whole ball game changes. As some analysts already fear, the judgment will be that U.S. Treasury securities — the fundamental tools in global markets — are no longer as good as cold, hard cash.
The lengthy standoff in Washington also undermined the credibility of the greenback as a reliable global reserve currency, which is already under a cloud thanks to repeated rounds of money printing.
These are trying times in the global economy; investor confidence may deteriorate because standard rules of thumb can no longer be relied upon.
The lesson for a medium-sized, open trading nation such as Australia is clear. Debt does matter, as does economic credibility in a febrile market climate. Fiscal repair is a first-order issue for Tony Abbott’s government.