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Millennium Post

US must avert fiscal default

A novel kind of protest has begun in the United States from last Friday (11 October). Tear-out petitions are being printed in leading US national newspapers, namely, The New York Times, The Washington Post, The Wall Street Journal urging the partially closed US government to reopen, meet its loan dues and other obligations and pass a budget by the end of the year. The same petition copy will be available on all stores of Starbucks Coffee shops throughout the country, as well as online at Starbucks website, for citizens to sign. These will then be delivered to the US government.

The petition is the brainchild of Howard Schultz, CEO of Starbucks Corp, the company which runs the famous eponymous coffee shops in the USA. Incidentally, Starbucks has now teamed up with Tata Group to run similar coffee shops in India and some are already operational.

Schultz said he embarked on acting to pressurise US government and politicians because of a ‘sad and striking realization that the American people have no platform with which to voice their frustration and outrage’ over the shutdown, which began last week after Democrats rejected Republican efforts to undercut the Affordable Care Act.

Since we wrote about it last week, it is about 16 days that the US government has shut down partially.  Enlightened citizen groups have therefore now started to demand re-opening of the government as the impact of partial closure is being felt.  So far, it has been inconvenient for some but not a major catastrophe for all. But the indefinite closure of the government has the potential of becoming so. This is because the US government will no longer have the powers to meet its bills and the government can see the risk of a default. Once that happens, it will be a serious situation.

Till the middle of the week the US government will have the financial powers to meet its expenses. But beyond 17 October  these will no longer be available. So then, the US government will not be able to honour any of its financial obligations including payment of its loans and interests. That could be the tipping point.

Any default on payment of principal and interests on the US government securities would hit the financial markets and this will be a kind of credit freeze. It will lead to a similar situation as in 2008 in the wake of the sub prime crisis when banks discovered that a lot of their securities were virtually non-recoverable, banks had stopped lending to each other. Once this credit freeze took hold, the financial markets started crumbling.

Any default on paying its loans and interests in time will result in a similar kind of situation when financial market participants, banks and others who hold large amounts of US government securities would feel the pinch. It can result in markets collapse mainly due to stalled transactions. Of course, the intrinsic and underlying value of US government securities should not suffer.

 To avoid events culminating into such an impasse, it is important that the rival parties –the ruling Democrats and the opposition Republicans—must come to an understanding regarding raising the US government’s credit limit. Once this is cleared by the legislators, the crisis would get resolved at least for the time being. But so far both sides are proving to be adamant and refusing to budge from their fixed positions.

The US administration headed by President Barack Obama says that the Republicans legislators and its House leader must unconditionally raise the credit limit. The Republicans demand that they are ready to do it provided that the President agrees to review his healthcare proposal which promises to give healthcare to all citizens at subsidised costs.

Howard Schultz described the current face-off as being ‘on a collision course with time’.  Schultz, one of the most prominent CEOs in the United States, said he was acting primarily as an American citizen, not an executive whose company’s profits rely heavily on consumer confidence and spending.’

Schultz had earlier raised a campaign against political contributions by US business when the government had faced a similar crisis on debt ceiling revision in 2011. Again, Schultz had urged all visitors to Starbucks coffee shops not to bring in firearms after a major shoot-out had resulted in loss of lives.

Maybe some Indian CEOs and business leaders might take on an activist role on public policy issues irrespective of their immediate business interests.
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