Washington Notebook: Debt Crisis Warfare

25/07/2011 11:13 BST | Updated 24/09/2011 10:12 BST

This weekend in Washington we saw the political spectacle continue - much to everyone's amazement.

On Sunday night just before the Asian financial markets opened, both sides announced that there was no deal and they planned to go their separate ways to solve the problem.

Once again both the sticking points and the "plans" themselves seem specially designed for each party to achieve maximum political advantage.

Now the fight is about whether any extension will go beyond the next election or expire just before - again it seems politics is ruling the day.

Both Democrats and Republicans seem to have taken this crisis as an opportunity to score political points to advance their own intransigent ideology.

Raising the debt ceiling is a routine activity that has occurred approximately 70 times without much ado in Democratic and Republican administrations alike.

What did not need to become a crisis has now become a very big one. And the world is watching.

There is an immediate and very real problem. The US must raise its debt ceiling to avoid the crisis of a default on its existing debt.

To be very clear - the failure to raise the debt ceiling would be nothing short of catastrophic.

As is the way of Washington, there is a difference between political rhetoric and facts - neither party is entitled to its own facts.

Despite the messages from both parties some irrevocable damage has already been done.

The world - especially the financial community no longer believes the U.S. Government functions properly and may not be able to be trusted to act like responsible adults in charge of the world's most important economy.

Clearly further damage will occur without question if a deal is not reached immediately!

If the debt ceiling is not increased and this "game of chicken" is not stopped, there will be real and measurable consequences for every American and the rest of the world as well.

These devastating consequences are something this administration has failed to make clear.

Perhaps it has chosen not to do so in an effort keep the markets from utter panic.

Unfortunately the time may have come for the president to paint a clear picture for Congress and the American people of what it will be like to fall off the edge of the economic abyss.

This just might be the reality check that Congress needs to get them to act responsibly.

Here is what's at stake:

1. The Debt the U.S. already has accrued would become even more expensive to continue to finance. This is like your credit card company announcing tomorrow that your current balance (not any future spending) -- will now cost you 21% interest instead of your current rate.

2. All loans would become more expensive - possibly intensifying the economic crisis and stopping any recovery. All credit could dry up.

3. The value of the "Almighty Dollar" will sink - this means that everything the U.S. imports will immediately become more expensive - the price oil and gas will go up.

4. The stock market would probably take another precipitous dive - the second in the same decade - making it almost impossible for people's savings and retirement accounts to recover in time for anyone to ever retire.

5. Last, but by no means least, all of this could precipitate the "Great Collapse" that was narrowly avoided in 2008. This would of course ripple through the world economy.

The other problem is the long term deficit which does need to be addressed and still needs a rational long term solution.

This crisis has been created by a minority group of new legislators in the House who have tied these two problems together.

This minority claims that their stubbornness is directly related to the message the voters sent in the last election.

The facts are - both parties for many years have created the long term deficit problem the U.S. currently faces - there are no clean hands here.

The U.S. deficit is not the fault of just one president. It did not happen overnight and it cannot be fixed overnight no matter what plan passes.

What does this all mean?

It means that the political rhetoric and divisions have come close to make the U.S. Congress completely dysfunctional.

And the polls prove it.

The positive ratings for Members of Congress hover just a little below those of mule skinners and snake oil salesmen.

We all know that we are fast approaching an election year.

However, what is truly alarming is that both sides in Congress are so focused on maintaining or gaining control and power that they have forgotten why they were sent to Washington in the first place - to do the people's business.

The art of political compromise - the stuff that governing is all about in a democracy - has been lost to the political self interests of both parties.

Instead of statesman and women - who do what is best for the American people - the last election sent a group of inexperienced legislators to Washington, mainly backed by the Tea Party, who are using this crisis as a rallying point to stand for their principle at all costs.

To add to the magnitude of the problem, there is a genuine lack of financial education and sophistication among the members of this just- elected group of ideologues.

I have already outlined some of the predictable consequences of a credit downgrade for the American people and the world economy - it is the unpredictable ones that could stall the world recovery.

Some members of this group have gone on the record saying that a default would not be a big deal and that the U.S. economy should be run like a household.

Although it may be a catchy political slogan - adhering to the daily talking points - the lack of understanding it shows about the U.S. economy is frankly frightening.

The American people may in fact be getting the government they voted for in the last election and deserve.

In 2008 they voted out moderate Republicans and Democrats alike - many experienced and rational voices - who understood and effectively did the people's business for many years.

Compromise is now a relic of days gone by when Ronald Reagan and Speaker Tip O'Neill, after a day of knock-down-drag-out legislative battles, would enjoy each other's company over the beverage of their choice at the White House.

Let us not forget, this is how this particular Democracy was set up by its Founders and how it is supposed to function - taking the best ideas from both sides to achieve balance.

It is still possible that the so-called leaders on both sides will lead before it is too late... before the U.S. and international financial markets take the decision out of their hands.

No matter what happens here, the real casualty may be the loss of confidence in the USA for a long time to come.

Also see my Washington Notebook blog on Sky News