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A DEFAULTING US NOT GOOD FOR US – ECONOMIC ILLITERACY BY ANY (EAST AFRICAN) STANDARD

Mr Charles Onyango-Obbo is the ‘Nation Media Group Executive Editor for African and Digital Media’ no less. It must have taken some years to have reached such an exalted position and such a title. In The East African Standard last published last weekend (1-7 August edition) Mr Onyango-Obbo held forth on the American debt crisis.

‘I think the US badly needs to default’, he wrote. Other Western countries that had not tried to be global powers or great nations (of late, at least) had spent the money saved on more sensible things, he argued, such as building healthcare systems ‘the US cannot even dream of’. ‘Default might just allow the US to look inward, which it needs to do’, he continued.

If America goes broke then they won’t be able to prop up ‘Israel and the Egyptian military’ he argued, and ‘the Middle East process might proceed faster.’ Warming to his theme he stated, ‘My sense is that the global financial crisis, which shrank Western aid to Africa in the past two years, partly explains the good performance of many African countries today.’

Mr Onyango-Obbo’s conclusion was thus: ‘Both the US and Africa, then, need America to default on its debt’.

Well aside from the fact that the US actually spends more per head on healthcare than just about any nation on earth, and the passing thought that an inward looking US hasn’t always been seen as a good idea, think isolationism and the Second World War etc, Mr Onyango-Obbo’s arguments and conclusion could be challenged on other grounds.

A defaulting ‘broke’ US would be a disaster for Kenya (and just about every other country in the world too). Kenya holds US dollar assets as part of our foreign reserves and investments. Should the US default the payment of dollar-denominated debts would be affected. A reduction in demand in the US economy, which would surely follow from default, would hit jobs and reduce remittances from the Kenyan diaspora. A devalued dollar, again as a consequence of default, would hit export markets worldwide, including Kenya’s. And a downgraded US credit rating would see interest rates surging globally and increase Kenya’s borrowing costs.

There are one or two other little points worth considering. Over half the diaspora remittances to Kenya last year, some Sh367 billion, came from the US, 117,000 US tourists made the trip to our fair land, direct foreign investment from the US grew by 16 per cent to Sh19.5million in 2008, and Kenya exports Sh22 billion of goods and services to the US every year.

In short: US default equals worldwide recession and Kenya in deep economic trouble.

As we all now know, the US didn’t default on its debt last Tuesday. It might be argued that raising the US debt limit, i.e., borrowing more, and cutting state spending, i.e., further reducing demand, isn’t the best solution, but Mr Charles Onyango-Obbo and others who blithely argue that a broke US might be good for us should realise that the economic earthquake that would be a defaulting US could unleash a worldwide economic tsunami that would swamp us all.

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