Posts Tagged ‘u.s. debt crisis’

Standard and Poor’s Downgrades U.S Debt; China Issues Warning to American Politicians

August 6th, 2011 Comments off

For the first time in its history, the United States has seen its sovereign debt downgraded by a major credit rating agency. S&P lowered its grading of U.S. government long-term debt by a notch, from AAA to AA +.  Predictably, the Obama administration is attacking the rating agency, accusing it of mathematical errors, similar to the reaction of Eurozone politicians when ratings agencies cut the rating of insolvent sovereigns. American financial pundits are also attacking this unprecedented decision by a major ratings agency as “premature,” while boasting that Moody’s and Fitch have thus far held their AAA rating of American debt.

In my view, the reaction  and rationalizations of American politicians and financial commentators responding to the loss of the nation’s coveted AAA status is totally irrelevant. What is relevant is the point of view emerging from America’s largest overseas creditor, the People’s Republic of China. The official Chinese news agency, Xinhua, has issued a commentary on Standard and Poor’s downgrade of U.S. sovereign debt which clearly reflects the attitude of ruling circles and policymakers in China. What follows is the Xinhua commentary in its entirety:


The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appeared to be numbered as its triple A-credit rating was slashed by Standard & Poor’s (S&P) for the first time on Friday.

Though the U.S. Treasury promptly challenged the unprecedented downgrade, many outside the United States believe the credit rating cut is an overdue bill that America has to pay for its own debt addiction and the short-sighted political wrangling in Washington.

Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators. Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth.

China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.

To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.

S&P has already indicated that more credit downgrades may still follow. Thus, if no substantial cuts were made to the U.S. gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way.

Moreover, the sputtering world economic recovery would be very likely to be undermined and fresh rounds of financial turmoil could come back to haunt us all.

The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.

It should also stop its old practice of letting its domestic electoral politics take the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits.

A little self-discipline would not be too uncomfortable for the United States, the world’s largest economy and issuer of international reserve currency, to bear.

Though chances for a full-blown U.S. default are still slim now, the S&P downgrade serves as another warning shot about the long-term sustainability of the U.S. government finances.

International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.

For centuries, it was the exuberant energy and innovation that has sustained America’s role in the world and maintained investors’ confidence in dollar assets. But now, mounting debts and ridiculous political wrestling in Washington have damaged America’s image abroad.

All Americans, both beltway politicians and those on Main Street, have to do some serious soul-searching to bring their country back from a potential financial abyss.




U.S. Economy Performing Much Worse Than Earlier Reported

July 31st, 2011 Comments off

The U.S. Commerce Department issued revised figures for the first quarter of 2011. It had earlier reported an annual rate of anemic GDP growth of 1.9 percent for Q1. Even if that number had been accurate, it was insufficient to reverse the catastrophic rate of unemployment and underemployment in the United States. The revised numbers are now in; the Commerce Department now says that actual GDP growth in the first quarter of 2011 was a virtually non-existent 0.4 percent. It also issued preliminary growth figures for Q2 of 1.3 percent, worse than expected. As with the Q1 data, it is likely that future revisions will show that Q2 did even worse.

What conclusions can one draw from this miserable economic data? Two things come to mind. In the first place, any preliminary numbers on the U.S. economy that derive from official government sources are highly suspect, and likely to be overly optimistic. Secondly, after an unprecedented level of public debt that is leading America towards fiscal ruin, the best that can be accomplished by the Washington policymakers is a Japanese-style “L” shaped recession. 

Now, what happens to the U.S. economy when the pump-priming stops, as will inevitably happen?  With revenue at historic lows and public expenditures at unprecedented highs as a proportion of the national economy, the frail American  economic edifice is floating on an ocean of unsustainable debt. While the current fiscal trajectory of the United States is headed towards a calamitous train wreck, a self-imposed and immediate elimination of the deficit, or even talk of such a possibility, will further exacerbate the economic crisis that never ended in America, despite official pronouncements.

 In the meantime, the U.S. political establishment cheerfully debates the debt ceiling. Both sides of the argument are in denial. The bottom line that both Republicans and Democrats refuse to confront is that the authorship of the present economic and fiscal crisis is bipartisan. The only hope of avoiding a full-fledged American sovereign debt crisis and its apocalyptic ramifications is creating a path towards much higher levels of growth that will reduce the ratio of debt to GDP to levels that can be sustained into the future. Instead of a serious policy debate, however, both parties are engaged in an ideological debate on cloud nine, divorced from the miserable reality of an American economy that is imploding.

If this is not an indication of dysfunction in Washington, I don’t know what is. Maybe the policymakers are not worried because they know that Fed Chairman Ben Bernanke will soon ramp up his printing press again. I am more inclined towards the vision of Dante than Bernanke, when it comes to the future of the U.S. economy.