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US debt a threat to security - USA / AUS Leadership Dialogue
July 17, 2010
8:47 pm
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rath
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July 17, 2010

AMERICAN power is facing the limits imposed by an unsustainable budget.

THE US is in recovery, yet the future of President Barack Obama, America's authority in the world and relations with allies such as Australia will be shaped by the long shadow cast by the global financial crisis.

The crisis has intensified the political deadlock in America.

With US unemployment at 9.5 per cent and growth forecasts being scaled back, Obama faces a significant rejection at the mid-term Congressional election later this year.

US politics is polarised over whether the path forward should be more stimulus spending or winding back the budget deficit.

American power now confronts the limits imposed by an unsustainable budget deficit and debt burden, a weakness that constitutes a pervasive risk to US security interests.

These dilemmas dominated the 18th annual meeting last week of the American-Australian Leadership Dialogue in Washington that was conspicuous for the attendance of Kevin Rudd and appearances by Secretary of State Hillary Clinton and World Bank president Bob Zoellick.

The message from top US political analyst Charlie Cook, publisher of The Cook Political Report, is that the Democrats are likely to lose more than the required 39 seats and will surrender control of the House of Representatives to the Republicans at the Congressional election. That would be a serious blow to Obama. At such a point he must either re-think his presidency or find new ways to revive his position.

America is polarised, with Obama's approval rating at 81 per cent among Democrats and 13 per cent among Republicans.

"I think US voters are less tolerant than before," Cook said outside the dialogue. "Voters are getting itchy trigger fingers. I think the Republicans will come up short in the Senate but the House of Representatives will tip their way."

Cook points to a series of polls in response to the question, "Is the country heading in the right direction?" that split around 30 per cent "yes" and 60 per cent "no". The danger signals are obvious.

Cook offers the following summary: most Democrat voters still love Obama; declared Republicans dislike him intensely, feeling "he can't be right on anything"; and independent voters think he is not the centrist they imagined.

"It's as though they're on a cruise and have just realised the destination is not the one they signed up for," Cook said. He stresses the mid-term elections cannot predict the 2012 presidential race.

The two threats to Obama's presidency are failure to deliver a recovery that creates jobs, and gridlock in Afghanistan 18 months from now.

This week's CBS news poll found only lukewarm support for Obama's fiscal stimulus.

It revealed a divided nation, with 47 per cent saying the priority should be deficit reduction and 46 per cent backing spending to create jobs.

A Wall Street Journal survey found nearly half of the private forecasters it polled said the US would not return to 5.5 per cent unemployment until 2015.

Prominent US economist and dialogue participant David Hale said the Congressional Budget Office had warned that over the next 10 years the US budget deficit could reach $US13 trillion ($14.8 trillion) on present trends. He said while tax receipts would rise during the recovery, the deeper problem was spending.

"The Obama administration is in the process of creating in this country a European welfare state," Hale said outside the meeting.

"That will increase the government share of GDP to 25-26 per cent on a sustained basis from 20 per cent over the past half century. This is a profound change. We are looking at budget structural deficits of potentially 7 to 8 per cent of GDP into the future.

"I think it will probably require some kind of financial crisis to bring the Republicans and Democrats together to address this.

"For instance, when things recover in 12 to 18 months' time we will see competition for capital.

"In that scenario government bond yields now at 3 per cent could easily triple, that would jeopardise the housing market and put pressure on Congress to vote tax increases and spending cuts to contain interest rate increases."

Hale argued that any enduring shift in the domestic economy must affect the US global role: "If the US becomes a version of a European welfare state there will be pressure to move to European levels of defence spending. We would be looking at much lower levels of US defence spending due to fiscal pressures. It could fall to 3 per cent of GDP over the next five years and fall below that to 2.5 per cent of GDP over a 10-year period.

"The new British Tory government is cutting defence spending and the UK defence budget may lose as much as 25 per cent in coming years.

"My message to all America's allies is: don't count on US security guarantees beyond the year 2020.

"America's fiscal situation could be so bad that Congress focuses exclusively on domestic issues, not on America's allies.

"I am not talking immediately but projecting out 10 years. Any sensible person looking at this country has to think there will be serious pressure on the US defence budget over this period. Even Hillary Clinton has hinted at these sorts of problems.

"I think allies such as Australia will have to accept more responsibility for their own security or form new regional alliances to buttress their security."

Former Australian ambassador to the US, Michael Thawley, believes America's allies will face greater challenges.

"We need to be aware that the international challenges facing the US and Australia, if anything, are growing," Thawley said when interviewed in Washington.

"The US is going to need more, not less help, in this situation. It is hard for us to appreciate the impact of the economic crisis on the US defence budget.

"The question will be how much more Australia should contribute to the security responsibilities of the United States for itself and for us. I suspect we will have to make a greater contribution than we have done in the past."

The leadership dialogue focused on the role of the G20, of which Australia is a member, and also of the Asia-Pacific community concept advanced by Rudd.

One of Obama's most favoured decisions for Australia was his embrace of the G20 to supplant the G8 in global economic decision-making. This will be seen as Rudd's finest foreign-policy achievement.

Obviously, it was not his own work, but his influence was apparent. This point won wide recognition in Washington this week.

World Bank president Zoellick told The Australian: "I think Kevin Rudd will go down as one of the first movers in the G20 process.

"He was one of the first to recognise its potential."

Zoellick had been pressing for a G14 or G15 that did not include Australia.

"I heard promptly from your prime minister," he said. "He was thinking and, frankly, plotting about the G20. He believed it would become a vehicle for good policy and a means to advance Australia's interest."

America's growing interest in East Asian regionalism under Secretary of State Clinton was apparent from the dialogue. After its conclusion Dick Woolcott, the Labor government's special envoy, seized upon the chance that it represented.

"Hillary Clinton has publicly said the US wants to be part of improved regional architecture," he told The Australian. "Given President Obama's recognition of a new power balance in Asia involving China and India, I think the sooner the US takes decisions committing itself to improved regional arrangements the better."

The Americans were assured at the meeting that under Prime Minister Julia Gillard there will be no change in Australian policy.

Yet the chemistry is different. Rudd had established himself with Obama and his administration. This is important in a White House not as easy to reach as that of Bill Clinton or George W. Bush.

The Americans kept asking about Gillard and, in Washington at least, she has big shoes to fill.

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