I seriously disagree with President Obama when it comes to civil liberties. I do disagree when it comes to Afghanistan. I don't think the process of going to war with Libya was flattering.
However, the left wing blogs I read are on fire with what the President was offering the other side on a silver plate. So he is right: He is willing to take a lot of heat. In fact, should the Republicans have agreed, there's a good chance this compromise would have made him a one-term president. You know, he has no spine and stuff like that.
So, what is the Right thinking? Do they want to bluff until the very, very last minute? When is the very, very last minute?
Comparing this to EU politics is frustrating and funny at the same time. EU politics are difficult to understand, but everyone is willing to compromise. We just got a compromise that included 17 countries, the ECB and the IMF. Most of the leaders of these countries are taking a lot of heat over what they agreed to.
US politics, on the other hand, are trivial to understand. But the two parties are unable to compromise. And while I would very much like to appear bi-partisan, it is very, very hard to argue that the responsibility for that is with both parties.
So what will happen? Well, the US is not going to default anytime soon. If in doubt the president will argue along the 14th amendment, just like President Clinton already proposed.
The real problem is not this deficit talk. Should some rating agencies, let alone all of them, downgrade US debt, a lot of institutional investors will have to get out of US papers. That might very well start an avalanche. But it probably would not.
The real problem is that US is unable to compromise for the foreseeable future. Just like California, whole US is paralyzed. And borrowing 40 cent of every dollar is already the worst deficit in the developed world, by far. I argued before, in my parable, that the US interest rates will remain low for an extraordinary amount of time. And then, suddenly, they will spike into the sky. It will be swift, but the aftermath will not be painless.
The story becomes really twisted when you think of Euro bonds. The reason most investors bet on US papers is that there is no alternative. It's a ponzi scheme: Investors do not buy 15-year US papers, because they think that they will get back the money from the US, but because they think that other investors think, that other investors think (insert loop), that these papers can be sold to other investors.
Should the EU (have to) introduce Euro-bonds there will be a sudden alternative. The Euro is already 20% more expensive than it should be from a PPP point of view. It's a bit crazy, but the EU's strength could be the trigger for the US's sudden decline. And, of course, that decline would devastate the EU as well, and the rest of the world, including China. Add some Saudi vs Iran war with frightended Israel in the center of it and remember Pakistani nuclear weapons in terrorists' hands. I'm not a pessimist - I just like to think this chain reaction through ..
What will happen? Nothing during the next few months or years. Eventually, however, FED and ECB will start printing money like mad, because that is the only way out of this mess. The last time problems of that scale were solved with inflation, we got a world war. Not solving this with inflation isn't a solution, either. The only thing I can guarantee you is that we won't get a world war. We'd rather get a decade of economic decline, hunger, misery and civil wars.
Anyway, I should remain careful with predictions, because I still don't understand the Republicans' grand plan. I hope there is one ...