Top Scoops

Book Reviews | Gordon Campbell | Scoop News | Wellington Scoop | Community Scoop | Search

 

Downgrade: Standard and Poor’s Economic Slap

Downgrade: Standard and Poor’s Economic Slap

by Binoy Kampmark

What power. What remarkable symbolic strength. Without the firing of a single shot in anger, a country has been, at least in a sense, brought to its economic knees. The capitalist system, that pervasive monster of modern society, with variations and aberrations, is now recoiling. Shares are shedding their global value, with $2.5 trillion lost during the week.

Who is the culprit behind this move? A credit-rating agency. There are no names of people – we merely have an entity – Standard and Poor’s. (With a name like that, our problems already begin.) Predictions that the agency would show restraint and be politically sensitive proved unfounded.

It is a perverse world we live in – but debt is valuable. The person with grand debts is not necessarily poor. In truth, that person might be deemed fabulously rich. It depends on what rating you get, and how that debt is valued. The American credit rating system rates one not on thrift but on the immense value of the debt one has. Pay by all means, but don’t pay all of it. For heaven’s sake, keep some afloat. The good debtor is indispensable.

The press release from Standard and Poor’s, via The Wall Street Journal, had a crude finality to it. ‘We have lowered our long-term sovereign credit rating on the United States of America to “AA+” from “AAA” and affirmed the “A-1+” short-term rating… The downgrade reflects our opinion that the fiscal, consolidation plan that Congress and the Administration recently agreed falls short of what, in our view, would be necessary to stabilise the government’s medium-term debt dynamics.’

Much of this effort on S&P’s part is exotic nonsense, the dreamy material that such an agency puts out to pretend it has an influence it should not. When governments are at the mercy of the anonymous, democracy is well and truly a deceased thing.

A sense of how wary one should be by this was that S&P had gone through the downgrade despite a vital miscalculation. Damien Paletta of the WSJ (Aug 6) noted that a battle of mathematics was taking place between the White House and the agency. Treasury Officials, after S&P’s notified them of their plan to downgrade the debt, got to the figures and found a miscalculation of ‘future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes’.

Should we even believe these people? These are the same individuals who failed in their task of rating mortgage backed securities when they were asked to. There is little doubt that the instilled myopia of an agency such as S&P’s succeeded, in part, in precipitating the financial crisis that has gripped global markets for some years now.

Nor are economists in agreement over how much debt as a value of GDP is too much debt. Paul Krugman is of the view that a debt ‘threshold’ is a fantasy, or at the very least, an exaggeration. Outcomes here will vary, but lowering a credit rating can have the effect of increasing the cost of borrowing. Eventually, costs are moved down the chain. Government, one of the largest of consumers, is one – but then come the public. Given that the US economy is already a sick patient, this is not the blow the Obama administration needed.

Other credit agencies have not decided to join the party. Moody’s and Fitch have shown greater restraint in pegging down the rating – for now. What will worry the Obama administration will be the Chinese reaction – and the flutter the downgrade has caused other members of the G7.

Being the single biggest creditor, the Chinese will be wondering if its debt-addicted client has the deep purse to repay its debts. The official Xinhua news agency was strident in its tone. ‘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.’

In its position as the largest creditor, China had ‘every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets.’ Strong measures had to be taken. Don’t, urged Xinhua, spend more on the bloated military or welfare entitlements. Make deep cuts. This tightly bound relationship – one ‘between a compulsive saver and a chronic spender’, to use Niall Ferguson’s words, is heading for an acrimonious divorce.

*************

Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge. He lectures at Selwyn College, Cambridge. He lectures at RMIT University, Melbourne. Email: bkampmark@gmail.com

© Scoop Media

 
 
 
Top Scoops Headlines

 

Keith Rankin: Narrow Vision: Subsidised Cars And Street Immunity
Problems make the world go round. Many of us – maybe the majority of workers, and certainly the majority of well-paid workers – earn our living addressing problems. A problem-free world would represent a major crisis for modern social-capitalism. (Yet standard economic theory continues to present the productive economy as a mechanism for 'satisfying wants', as distinct from 'addressing problems... More>>


Biden In Tokyo: Killing Strategic Ambiguity
Could it have been just another case of bumbling poor judgment, the mind softened as the mouth opened? A question was put to US President Joe Biden, visiting Tokyo and standing beside Japan’s Prime Minister Fumio Kishida: “You didn’t want to get involved in the Ukraine conflict militarily for obvious reasons. Are you willing to get involved militarily to defend Taiwan if it comes to that?” The answer: “Yes. That’s a commitment we made.”.. More>>

Dunne Speaks: Robertson's Budget Gamble On Treasury
The popular test of the success or failure of Grant Robertson’s fifth Budget will be its impact on the soaring cost of living. In today’s climate little else matters. Because governments come and governments go – about every six to seven years on average since 1945 – getting too focused on their long-term fiscal aspirations is often pointless... More>>


Digitl: Infrastructure Commission wants digital strategy
Earlier this month Te Waihanga, New Zealand’s infrastructure commission, tabled its first Infrastructure Strategy: Rautaki Hanganga o Aotearoa. Te Waihanga describes its document as a road map for a thriving New Zealand... More>>


Binoy Kampmark: Leaking For Roe V Wade
The US Supreme Court Chief Justice was furious. For the first time in history, the raw judicial process of one of the most powerful, and opaque arms of government, had been exposed via media – at least in preliminary form. It resembled, in no negligible way, the publication by WikiLeaks of various drafts of the Trans-Pacific Partnership... More>>




The Conversation: Cheaper food comes with other costs – why cutting GST isn't the answer

As New Zealand considers the removal of the goods and services tax (GST) from food to reduce costs for low income households, advocates need to consider the impact cheap food has on the environment and whether there are better options to help struggling families... More>>