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The New York Stock Exchange, Wall Street, New York.
Dr Peter Morici: The Standard & Poor’s downgrade of
US government debt can only have lasting economic consequences if it
significantly affects the interest rates US government pays or political
machinations in Washington.
Global investors have little alternative but to continue to do business in
dollars and store wealth in Treasuries. The bonds denominated in other reserve
currencies - - the yen and euro - - are simply unavailable in suitable quantities.
Japanese institutions hold most of Japan’s privately-held sovereign debt - - simply
the Japanese have too high a savings rate, and their government borrows from
them, through banks and funds, to finance deficits that keep its economy going.
As the long term prospects are for the yen to rise against the dollar, global
investors are holding about all the yen-denominated sovereign debt they can get
their hands on.
The Eurozone has no central government that can levy taxes, spend significant
sums, and issue bonds. Instead, investors must purchase euro-denominated debt
issued by the member states.
The largest issuer of euro bonds is Italy, and it is doubtful that investors
would swap US Treasuries for Rome’s paper. Even if more German and French
sovereign bonds were available, the future of the euro is so much in doubt -- and
likely to stay in doubt for many years - - that the long term stability of even the
strongest Eurozone economies is uncertain.
US bonds are subject to the risk of unanticipated inflation if the US government
keeps printing too many bonds and greenbacks but that risk pales in comparison
to the risk that the Eurozone will disintegrate and seriously impair the German
and French economies.
The fact is Washington prints the world’s currency, and will likely do so for a
very long time to come.
China, the biggest purchaser of US debt, likes to carp about US fiscal affairs
but will keep on buying dollars to maintain an undervalued yuan and convert
those into Treasuries. Otherwise, Beijing must finally let the yuan rise
significantly against the dollar, and that would end China’s export boom and
Longer term, all the debt Uncle Sam is piling up is bad for the United States
but the problem won’t be resolved anytime soon.
The Administration treated the S&P downgrade like it does all other bad economic
news -- it sought to blame others, circumstances and the messenger. The Tea
Party, bad luck like the Japanese earthquake and the competence of the S&P staff
- - who used CBO (Congressional Budget Office) numbers to assess the future of
the US debt burden - - were all cited by the President’s surrogates in
interviews and the Sunday talk show circuit.
Communications in the White House are such a closed loop that the Administration
does not even recognize help when it gets it from critics. The S&P report gave
the President ammunition to push for higher taxes - - ill-advised as that might
The S&P report pointed to political dysfunction in Washington, fingered
Republican reluctance to raise taxes and cited skyrocketing health care costs.
It did not single out Democrats resistance to cutting Medicaid and Medicare, and
this despite spending is more the problem than taxes. Simply, spending is up
$1.1trn over the last four years, when only $200bn was needed to cover
inflation, whereas reinstituting the Bush tax cuts for all brackets would raise
revenues by only $300bn.
The report went on at some length about how different taxing scenarios would
affect the situation. It said little about what curbing US health care spending
to German levels—also a private system—would do to future US debt, or even
adopting Congressman Paul Ryan’s reforms would effect.
After a temporary disruption in stock and bond markets, this report is likely to
little affect what the US government, companies or consumers pay for debt.
At the time of the downgrade, the stock market was in an adjustment owing to
concerns about the economy. Neither those nor the deficit worries will abate
until the President offers the country a plan to get the economy going - - other
than blaming others, hoping for a favorable turn of events or criticizing those
that keep score on the economy and government’s performance.
Professor, Robert H. Smith School of Business, University of Maryland,