Recent events with the U.S. government are difficult to comprehend.
A complex set of political factors led to the current impasse which may, in turn, lead the U.S. to default on its debt.
The extreme wing of the Republican party has always argued against the growth of government. In 1936, for example, it pushed for a repeal of the Social Security Act, arguing that it spelled the financial ruin of America. The current target is the Affordable Care Act passed in 2010, a.k.a. Obamacare.
The Tea Party says Obamacare is widely opposed and likely to destroy the American economy. They are trying to use the budgeting process to force President Barack Obama to nullify the law. If he doesn't cave on Obamacare, they will not authorize further spending by the government. Hence, the shutdown of a large part of the U.S. government as the House of Representatives refuses to vote on budget measures already approved by the Senate.
Moreover, and this is the really scary part, they are threatening to block any attempt to raise the U.S. debt ceiling, which limits total government borrowing. Since annual expenditures currently exceed revenues by close to $1 trillion, the borrowing limit will be reached this month. Without the ability to incur further debt, the government will be unable to pay its bills, including interest on debt, and it will be in default.
Five years ago, when Lehman Brothers collapsed, the world's financial system suffered a serious setback which required massive government intervention (more than $800 billion in loans) to stem the hemorrhaging.
If the U.S. defaults, the impact will be orders of magnitude greater. The U.S. financial system would cease to operate, and the global impact would be catastrophic since the U.S. dollar is the world's international reserve currency.
The trillions of dollars of U.S. government debt held by China, Japan and virtually every other nation - including Canada - would become useless because no one would know whether it was still backed by the U.S. government. Because these reserves would no longer be able to be used to facilitate international capital flows and trade, the world's financial system would freeze up.
Financial Armageddon would ensue.
The Tea Party neither understands nor believes this can happen, in spite of near-universal agreement by bankers, business leaders and economists that they don't know how to handle such a situation. The Tea Partiers want to kill Obamacare and will not be deterred by these warnings. They believe they can force Obama to "blink" and give in to some or all of their demands.
Given that Obamacare is his crowning achievement and that he never has to face another election, their leverage over the president is non-existent. And the precedent would be dreadful.
Some observers believe the Republicans' opposition to Obamacare is based upon a fear that, once middle- and lower-income people become accustomed to health coverage, they will be ardent supporters of the Democratic Party.
Thus, the Republicans believe they are fighting for their political lives.
Others believe that opposition is based on irrational and racist animosity towards the Obama himself.
How does this end? The Speaker of the House, John Boehner, insists that, unless a majority of his party supports measures to open the government and raise the debt ceiling, he will not bring them to a vote. He knows rational Republicans would join with Democrats to finance the government, the shutdown would end and the Tea Party would depose him as speaker. Some consider this a reasonable price for averting Armageddon.
David Bond is an author and retired bank economist. Email: