Standard & Poor's decision to put the US on warning that it may lose its AAA debt rating is both deliciously absurd and genuinely earthshaking.
Absurd because S&P are some of the people who missed the real estate bubble and mortgage bond implosion; and earthshaking because not only has the US never held less than a AAA rating, much less been put on threat of downgrade, it thoroughly deserves the warning.
Standard & Poor's cited the risks of a lack of a credible plan to reduce the national debt and said the move flags a one-in-three chance of a downgrade over the coming two years.
The ratings agency said there was a material risk policymakers won't come to a meaningful and plausible budget agreement by the 2012 elections, leaving the US weaker than its AAA-rated peers.
Beyond the risk of a lack of political will to tame the budget, S&P also raised the fiscal threats coming from the financial sector, which it now puts as higher than before 2008. So much for financial reform, then. Net external debt, a measure of US dependence on foreign creditors, is now at 300% of current account receipts, among the highest of any sovereign, much less those that consider a AAA rating to be something akin to a birthright.
What is both said and not said in S&P's analysis is the fact that it is only the US's exorbitant privilege as the main global reserve currency that even allows it to have strayed this far without already being downgraded.
If Canada was in an analogous position to the US it would have long ago been kicked out of the AAA lounge, in much the same way that if I behaved like Charlie Sheen I would be homeless.
This is perhaps why the threatened downgrade is so hard to digest; the US and its supposedly risk-free Treasuries are at the heart of all global finance , and a system in which people will have to find alternatives, both as investments and yardsticks, is difficult to imagine.
That something is difficult to imagine, however, does not mean that it won't come to pass, only that if it only partly comes to pass the impact will be big. Firstly, if the US loses its AAA rating it could prove to be the turning point in a loss of confidence that starts a debilitating move out of not only Treasuries but dollar assets. After all, the US won't default on debts which it can erase with the flick of the switch on the printing press, but it may well inflate its way to making dollar holdings very bad investments.
Secondly, the lack of alternatives means that a move out of Treasuries, if it ever came, would be hugely distorting for the rest of the world's debt ecosystem. There simply aren't enough "safe" alternatives.
One argument advanced for why we shouldn't care about the threatened downgrade is S&P's (and other ratings agencies') track record of being spectacularly wrong, first in various emerging market sovereign crises and then during the housing bubble.
I'd argue the opposite; ratings agencies have a reputation of being timid and late, and are also beholden to government-granted status as Nationally Recognized Statistical Ratings Organizations for much of their business. That one of them steps up and threatens the US's rating is a sign that cannot be ignored.
The best, and perhaps the most likely, outcome is that the US enjoys a long, slow slide from being everyone's favorite debt issuer and owner of the main reserve currency to something a whole lot less. After all, being free to borrow cheaply and almost without limit has hardly been an unalloyed blessing. This implies losing the AAA-rating, but maybe only for long enough to teach itself and the rest of the world not to be so dependent upon it.
The transition from a uni-polar financial world to something with more checks and balances will be painful, but in the end beneficial.
Absurd because S&P are some of the people who missed the real estate bubble and mortgage bond implosion; and earthshaking because not only has the US never held less than a AAA rating, much less been put on threat of downgrade, it thoroughly deserves the warning.
Standard & Poor's cited the risks of a lack of a credible plan to reduce the national debt and said the move flags a one-in-three chance of a downgrade over the coming two years.
The ratings agency said there was a material risk policymakers won't come to a meaningful and plausible budget agreement by the 2012 elections, leaving the US weaker than its AAA-rated peers.
Beyond the risk of a lack of political will to tame the budget, S&P also raised the fiscal threats coming from the financial sector, which it now puts as higher than before 2008. So much for financial reform, then. Net external debt, a measure of US dependence on foreign creditors, is now at 300% of current account receipts, among the highest of any sovereign, much less those that consider a AAA rating to be something akin to a birthright.
What is both said and not said in S&P's analysis is the fact that it is only the US's exorbitant privilege as the main global reserve currency that even allows it to have strayed this far without already being downgraded.
If Canada was in an analogous position to the US it would have long ago been kicked out of the AAA lounge, in much the same way that if I behaved like Charlie Sheen I would be homeless.
This is perhaps why the threatened downgrade is so hard to digest; the US and its supposedly risk-free Treasuries are at the heart of all global finance , and a system in which people will have to find alternatives, both as investments and yardsticks, is difficult to imagine.
That something is difficult to imagine, however, does not mean that it won't come to pass, only that if it only partly comes to pass the impact will be big. Firstly, if the US loses its AAA rating it could prove to be the turning point in a loss of confidence that starts a debilitating move out of not only Treasuries but dollar assets. After all, the US won't default on debts which it can erase with the flick of the switch on the printing press, but it may well inflate its way to making dollar holdings very bad investments.
Secondly, the lack of alternatives means that a move out of Treasuries, if it ever came, would be hugely distorting for the rest of the world's debt ecosystem. There simply aren't enough "safe" alternatives.
One argument advanced for why we shouldn't care about the threatened downgrade is S&P's (and other ratings agencies') track record of being spectacularly wrong, first in various emerging market sovereign crises and then during the housing bubble.
I'd argue the opposite; ratings agencies have a reputation of being timid and late, and are also beholden to government-granted status as Nationally Recognized Statistical Ratings Organizations for much of their business. That one of them steps up and threatens the US's rating is a sign that cannot be ignored.
The best, and perhaps the most likely, outcome is that the US enjoys a long, slow slide from being everyone's favorite debt issuer and owner of the main reserve currency to something a whole lot less. After all, being free to borrow cheaply and almost without limit has hardly been an unalloyed blessing. This implies losing the AAA-rating, but maybe only for long enough to teach itself and the rest of the world not to be so dependent upon it.
The transition from a uni-polar financial world to something with more checks and balances will be painful, but in the end beneficial.
Source : ET
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