President Barack Obama and Congressional leaders, Republicans and Democrats, might have struck a last-minute budget deal that will raise the nation's statutorily fixed borrowing limit and thus avert a calamitous default by the federal government. But the bitter political acrimony in the run-up to the agreement, the intense politicisation by far-Right sections of the Republican party of what ought to have been a routine but necessary enhancement of the government's borrowing powers, and the apparent willingness of sections of the political elite to risk the nation's reputation rather than give up on dogmatic, pro-rich positions speak to the crisis at the heart of the U.S. political economy. When the final details of the deal are released, the Obama administration and the Democratic Party would be seen to have compromised heavily on what they had argued were non-negotiable positions. The Republicans had argued for, and finally succeeded in imposing, large spending cuts in the federal budget in return for raising the debt ceiling. On the other hand, the Democrats' proposals to have new taxes so that the rich would share a burden of social costs, especially of Medicare, seem to have been given the go-by. The deal envisages a reduction of about $2.5 trillion from the federal budget over the next 10 years: the first $900 billion to $1 trillion will come from domestic discretionary programmes that are for the benefit of the poor and the middle class. Almost certainly, the agreement will hinder economic recovery.
For now, the U.S. will manage to escape the consequences of the debt limit showdown, with its credit ratings intact. Various arms of the government will be able to borrow more and honour their commitments. However, it is clear the country's reputation has suffered grievously. The bitterness, division, and dysfunction that resonated around the world in recent weeks as the world's largest economy veered towards default did more than enhance an already existing perception that it was losing its aura. Questions will be asked as to whether it will remain the world's economic haven and the country that is capable of leading the world out of financial crises and recessions. It is now quite uncertain whether the U.S. will be able to cobble together, with other rich countries, stimulus packages to spur the world economy as President Obama did in London two years ago. The desperately crafted budget deal signals a new phase of austerity for the U.S., which might turn more inward-looking. The dollar, for long the world's reserve currency, is already under pressure as investors have turned to gold and strong currencies such as the Swiss franc.