The US is on the brink of a major economic crisis after negotiations between Barack Obama and Republican Congressional leaders over the national debt dramatically broke down on Friday.
Obama, showing anger, passion and verbosity rare in public in his two-and-a-half years as president, called a press conference at the White House at short notice to express his frustration with the Republicans.
He told reporters there had been "a breakdown in trust" between the White House and the Republican leadership. In a snub to the president, the Republican leader in the House, John Boehner, failed to return calls from the White House throughout the day, with his office saying he was unavailable. Boehner finally called the president on Friday evening to inform him the Republicans were walking away from weeks of negotiation aimed at resolving the country's debt crisis.
The collapse in talks comes with 10 days left until the US, for the first time in its history, faces the prospect of defaulting. If it fails to raise its $14.3tn (£8.7tn) borrowing ceiling, there will be serious consequences for not only the US economy but other countries around the world.
The Republican withdrawal came just a day after Obama and Boehner had seemed close to an agreement on the broad outlines of a package to cut $3tn in federal spending over the next 10 years, and to raise some taxes. But Boehner was unable to sell it to diehard Republicans in the House, many of whom were elected last year with the support of the Tea party movement, which seeks deep cuts in spending but no tax rises.
In a letter published just minutes after Obama began to speak, Boehner said: "In the end, we couldn't connect. Not because of different personalities, but because of different visions for our country." He blamed Obama for failing to agree to deep cuts in social security and other welfare benefits and for demanding that taxes be raised. "For these reasons, I have decided to end discussions with the White House," Boehner said.
An exasperated Obama called Democratic and Republican Congressional leaders to meet at the White House at 11 o'clock on Saturday morning to offer alternative proposals for dealing with the looming deadline on the debt ceiling.
The president insisted that the debt ceiling had to be raised or Americans across the country would suffer. "We've got to get it done. It is not an option not to do it," he said. If there is no deal, he said, he could not guarantee that the 70 million cheques due to go out to social security recipients, veterans and others on 3 August, the day after the deadline, would be sent.
The US chamber of commerce expressed nervousness over the prospect of America's credit rating being downgraded.
Federal payments to state governments could also be hit. State governors are laying down emergency plans, with California, among others, looking for alternative sources of borrowing to tide it over. Banks and businesses are also working feverishly preparing for worst-case scenarios.
The crisis is the biggest test of wills yet between Obama and hardline Republicans endorsed by the Tea party movement. It dwarfs the stand-off earlier this year when the federal government faced shutdown.
According to the Treasury, America reached its borrowing limit of $14.3tn on 16 May but is able to keep servicing its debts until 2 August.
Mark Blyth, professor of politics at Brown University and author of the forthcoming book Austerity: The History of a Dangerous Idea, said no one knew what the impact of defaulting would be because the situation was unprecedented.
He said the US had a long-term, serious problem, given its enormous fiscal gap and dependence on China, which has been bailing the US out and which has twice expressed concern about the impact of the default crisis on its investments. The US economy "is like Wile E Coyote who runs off the cliff and it takes him a while to realise it. What has been keeping him up is Chinese blowing air up," Blyth said.
Obama, up for re-election in November next year, has seen a sharp decline in his popularity because of the sluggishness of the US recovery from recession, with unemployment frustratingly failing to budge from just over 9%.
In spite of the negative ratings on his handling of the economy, he is doing better on the deficit issue, according to polls, with many independents, the voters who usually decide elections, blaming the Republicans and preferring a mix of spending cuts and tax increases rather than spending cuts alone.
Credit ratings agencies such as Moody's and Standard & Poor's have put the US on notice that its triple-A rating could be downgraded, which would be a national humiliation.
A glimpse into what might happen was provided by Minnesota earlier this month, when the state had to close down, with disruption reaching even minor elements of daily life, from beer supplies to adoption papers.
Ross Baker, professor of politics at Rutgers University, compared the US economy, with its huge debt, to a patient who needs both first aid and long-term care.
"The Democrats are the first-aid squad with their concern over the lack of money to stimulate the economy and produce jobs. The Republicans are in charge of the long-term care facility with their preoccupation with multi-generational debt levels," Baker said.
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