And much worse and i think that is what people think at the moment. Rose i am going to stay with that. I dont know i dont want to go to the idea of default yet. Sebastian, what do you think, what does it say . Is there regard he is of the outcome some diminished credibility for the United States because of the amount because of the argument, you know, democracy doesnt work as well as we thought it did . Right, i mean, with this happening, if we stick on the financial theme here at the time when the global dominance is possibly more resented than ever since 1989 when we had a mix son shock and the gold convertibility was ended. And i think this sort of impatience with the u. S. Is partly because the whole world owns u. S. Treasury securities which dont appear to be quite 100 percent secure although i agree with martin that probably we will get through this but nonetheless even a shadow of a doubt when you own that much around the world is worrisome, on top of that you have got the fact that the Federal Reserve just by talking about it, about a taper of this unconventional Monetary Policy a few months ago caused, set off an emerging market you can say it is not its faults, it is investors reacting to that but the truth is that u. S. Monetary policy and for the financial dealings have these global ramifications and so any time the u. S. Does not appear to be behaving responsibly and predictably, it has quite a bit effect around the world. Rose evan . In china, this has renewed calls for what they call the deamericanation of the Global Financial system. I mean this is from the Chinese Government perspective and increasingly in the chinese Financial Community evidence that the major bargain that china made which was to invest heavily in the u. S. , financial system, china after all is the largest holder of u. S. Debt, 1. 3 trillion and Treasury Bonds that that may, in fact, not be reliable and this is the latest demonstration of that beginning two years ago and if you go back and look at the comments that the chinese leadership was making that was a previous generation of leadership, back then they were saying, we know that the american system will right itself, that leadership will prevail and that the right decisions will be reached. In this case, these days what i am reading is they are saying some of the same things but it is very clear they are concerned and they are no longer quite as reassured as they might have been a couple of years ago. Rose well i remember that in either the recession of 2008 people said, people quoted chinese leaders as saying we wanted to be like you, we no longer want to be like you. Yeah. Thats in a sense, that is the longterm damage in this case. And i think it is interesting if you hook at the fact that president obama after all had to cancel his trip to southeast asia, that was a trip that his host didnt even really want to have, originally this conference was one that the president obama had encouraged and called for, they pulled it together, and then the fact that he canceled, there is a short term embarrassment, obviously, and it provided a nice platform for the chinese leadership and chinese presidency to go and show that he was in a position of responsibility and that he was present, but the longterm damage is that sends a message to American Allies that you may put your faith in us, you may put your stock in us but we may not show up when the moment arrives and that is a concern for them. Rose speak to that. Yes, go ahead sebastian. So you created the chinese leadership from a few years ago saying ultimately we would like to be like you. The other opposite quote there right now is the chinese financial revolution, institution up in new york a few years ago after the any man brother, neiman shock, we dont like you guys but what else are we supposed to hold . And that is the other side of it. Rose and has that changed now, martin . No, i think the reality is they have even fewer choices. I think they are not going to be able to make the remnant b a true global currency any time soon and the euro doesnt really look great and what else is there . What really frustrates me about this is if you take away from the circus, the u. S. Economy, in my view is in rather good shape and has a real potential for performing rather well in the next few years, perhaps much better than most people expect. It has done a lot of the adjustment that is needed. It is clearly the economy, the big economies of the world and i am not excluding china, which is in some sense the best shape. Of course it cant grow as fast as china because it is not an emerging country, but if the congress could sort this real nonsense out, this complete common sense and makes absolutely no sense at all to anybody, as far as i can see, then i think the u. S. Would look great and nobody would have any real doubts and be very happy to hold u. S. Securities and the Federal Reserve have been complaining about the Federal ReserveMonetary Policy as long as i have been an economist and that is about 45 years. Rose i remember being at a conference you probably were at too and tim geithner was there and we said we dont have an economic rob. We have a political problem that is the score of it, yes. Five years ago, you had a very big economic and financial problem, i wouldnt say it has all been resolved, there are some very big difficulties but no doubt at all, none, that the u. S. Has done a better job of managing that financial crisis, sorting through the problems that were created in the financial system, in the housing system, than any other crisis affected country, particularly in europe, japan doesnt look great despite the economics, the economics have clearly improved on many fronts but the politics for reasons that i dont understand really have gotten worse, the only explanation i have is that the opposition here are creating trouble because they fear actually the economy might do well. Rose you understand the conventional wisdom is that you have redistricting and people were in safe seats and had no fear of losing. Sat the conventional wisdom. Rose and worried about some challenge to their extreme. I mean, to constantly bring the country to the brink of a default talk every couple of years is new to me, i havent seen that before. Rose and you any the people that are affected by some analysis of what would happen if there was a default, people like small business, large business, people who are, you know, have some sense of how the economy would be devastated would be speaking to those people and saying, you know they, one they may not listen, the other thing is the people in the Financial Sector look at what gras jamie diamond says over the weekend they dont care what he says and my impression is that a lot of people supporting the republicans dont believe this. They think, they actually think there is no danger, it would actually be a good thing for the government to be forced to shrink suddenly and they have an echo chamber that says this so a degree of unreality to me that pervades many of the people who are supporting these actions. Sebastian, who happens if there is in fact default . They do not reach an agreement, there is a default, what happens then . Two mechanisms that seeks into the economy. The first is simply that Government Spending can be constrained, because you cant issue anymore direct so there is a direct minus in the economy through that channel and there is more unpredictable one is what happens in the Financial Markets because if the Financial Markets decide that there really is a possibility that they will not get paid on a government security, then all of the be billions of dollars of lending that happen using those securities as collateral through the repo market would freeze up and if that happened it would be a Lehman Brothers moment where nobody could rely on the credit lines they has. Had taken for granted and thats where you get kind of a heart attack in the financial system. Rose there is also this, for a while, the argument, evan you and i have talked about this at this table about china was, i dont know how far back this goes but it was frequently something that i heard, we just want to get on with the economic with prosperity and happiness and whatever, and we dont want conflict, we dont want engagements, we will watch america fight its wars in afghanistan and iraq, we just want to build the biggest economy we can and have more people come into the middle class and create our own demand and all of that. You know, rose go ahead. That is the most interesting thing about this moment from what it means for china around is that it weakens the hands of a voice within the Chinese Government that is calling for. Rose right. A move towards a new, not a brandnew style of government, but a more liberal lized more reformed, more open, more pluralistic form of government this is very strong evidence against them and so you see on the chinese web these days, there is sort of a strange celebration among some members, these are sort of middle class Chinese People on the internet who say what you are seeing in washington is a demonstration of resilience, it sounds bizarre to us sitting here but saying look this is a government that is hashing out its gravest differences in public and there is not violence in the streets. But privately this is very damaging to chinese liberals and people trying to make a case the china party, the communist party needs to move into a new chapter. Rose and the other side which may be gaining, gaining because of this what do they represent . What are the ideas they have . What they represent is that the period of the last 30 years which was dominated ultimately by integration with the american system, politically, economically and geo strategic terms to allow the United States to maintain its role as the dominant power in the world while china continued to grow that that that period, that period after 30 years has sort of run its course. There is now a feeling within particularly conservative chinese circles it is time for china to stand up and exert itself to its full height. Rose so thats the point, really, isnt it . For a long time people would say about the United States, if the United States somehow pulls back from its leadership role in the world there is no one to step forward. That was that was the argument that was made. The chinese are now prepared and do they have all that it takes to exercise that kind of leadership role so no matter what happens we will see a different kind of competition in the world between china and the United States . Personally, i remained very skeptical about the ability of the chinese to project a Global Leadership role on many levels, i think many other countries in the the world are deeply suspicious of them much more so than of the u. S. , chinese really doesnt have allies. Its system is not exportability. There if it if it does come it will be in a very nationalist way which exacerbate this and i spent a lot of time talking to chinese policy makers they dont have a vision for the world they have an antivision they dont like what the americans are doing but what sort of monetary order do you want, what sort of system do you want . They really dont have an alternative so if this were to than it would only be because the u. S. Has completely left the field. Rose yes. And unfortunately, over the last couple of years, that is be gik to, beginning to look like actually a possibility but my fear is not there will be a clear replacement but it would be a power vacuum and it would be disorderly, very disrupt if the and we wouldnt know how it would end and it would begin to look a little bit too much like the twenties and 30s for our liking. Rose that would not be good. Let me make one point, sebastian. Nature abhors a vacuum. Yeah, i was just going to add that as well as china system not being readily exportable to the rest of the world i have been hearing in the last few weeks how it may not be exportable even to the chinese elite, that the crackdown on corruption quote unquote, sort of morphed into sort of a scary near maoist that are leading private leaders that have done well there to seriously question whether the next ten years they can remain in the country, because their own sort of security, personal security is something that they have just recently i think a little bit doubted. And so i think while we are sitting here appropriately discussing the problems in the u. S. Political system we should not forget the problems over there. Rose that is part of the argument. I think china has much bigger problems than the u. S. Does, apart from this complete nonsense in the political system. And i mean, one that is very good indication of this, where do the chinese elite send their children to school and university . They send them to the u. S. And for very good reason. Rose all right. I would say also if the chinese, the economy right now is growing more slowly than any time it has in decades and if they lose a point or two off the gdp growth as a result of some sort of global chaos produced by a default it will hurt them domestically in economic terms and that means in political stability and thats what worries me. Rose what about, i mean the tension within social tension would arise, i would assume because of unemployment and things like that, would it not . Absolutely. Chinese American Hedge Fund friend of mine compare china to a collateralized debt obligation and what he means is that, you know, there is sort of this payout structure whereby the senior claimant whose are kind of the chinese elite are always going to grab whatever, three or four percent of gdp growth for them and if you go through a beijing restaurant in the smart districts you see that happening front of you, so what the middle class and the poorer people get is sort of the leftovers, slightly, so that is why if you go from the current seven and a half percent growth you lost a couple of percent points and down do a five and a half i think it is ripe that political stability could not be taken for granted. The simple truth is, we all accept this, i think, and probably privately most people, outside the ux, is accept it, the u. S. Is the only leader available. If the u. S. Fails to provide leadership, the outcome unambiguously is a power vacuum. A power vacuum are unstable and the world will probably fracture in regional lines, we dont know how, it would be incredibly undesirable and utterly unnecessary and that is what i find so tragic about this situation. Rose this is what i find tragic too. Let me postulate this too. If somehow the United States had its act together with a healthy band with a healthy amount of partisanship, a healthy amount. Of course, normal, it is a democracy we know that. It is a democracy and could focus on different ways to achieve its goals this could be a golden age for the United States in a sense because of some of the things it has, education being one, a lead in science and research another and it is therefore it could support that and be a remarkable time in the 21st century does not necessarily belong in asia. I think the opportunity over the next 20 or 30 years for the ux, is, u. S. I never think beyond that period if it gets things reasonably right which are within its grasps which require washington to do some sensible things the but the focus would not be on the debt and deficit that is not the biggest issue. Rose it is growth. It is growth, as Larry Summers argued, it is investment in infrastructure, it is improvement of the educational system, it is a whole range of things, it is building on what it has. Rose but Everybody Knows that. And then the question you have to ask, why is this not the focus of the u. S. Political debate and that is what i dont understand. Rose lets assume there is a terrible default, it does what to the Global Economy . I think it is an absolute catastrophe. I mean, sebastian expressed this. I think gdp, even if they managed to keep the avoid the default, the contraction could be anywhere between six and ten percent of gdp to cut the fiscal deficit overnight by four percent of gdp which is what they would have to do essentially means an enormous reduction in gdp because you have no built in stabilizers anymore, you just have to get to the outcome immediately. That would be a tremendous fall gdp, would sater confidence, even if you didnt have the default, if you have a default as well, i mean, all bets are off. It would be in my view bound to be worse than in the fall of 2008. So it is a very dangerous moment and what terrifies me is people are saying it is not a problem. Rose wait, onees second, sebastian. Who are the lots of people. There are people in the house that say, they are your legislators who are saying we can live with this, it is not a problem. Rose but some opinions are worth more than others. Well the people who vote the people in the house count a lot more than mine. Rose sebastian, last word. In a way, in a perverse way you want a Financial Market reekion to come quickly and to be big, because facility will force congress to do something about the debt ceiling and i think thats the way you get out when the Financial Markets start talking, washington will start listening . It would be like the tarp moment, you remember the first failed the market collapses and the second vote succeeds. Thats the hope. Rose indeed, thank you, martin, thank you sebastian, thank you, evan. Great to be here. Rose we will be right back, stay with us. I wish upon a star,. Rose Graydon Carter he served as editor of vanity fair since 1992, during his 21 year tenure he has won 11 National Magazine awards including two for general excellence, vanity fair is wellknown for its celebrity covers and as well as hardhitting journalism, the great Christop