The economic world is in a hubbub overthe recently released S&P report revising the credit rating agency’soutlook on the United States from “stable” to “negative.” Some, such as The Atlantic’s James Fallows, don’treally see what all the fuss is about. Fallows denigratesthe S&P rating as opinion, and argues that their views on who would win “theHornets-Lakers series, or this season of American Idol” would “carry just asmuch weight.”
Now I won’t go as far as that. AlthoughS&P is playing with the same information as you or I, they do spend quite abit of time taking a look at government finance. After all, it is their raisond’etre. And as Fallows’ colleague at TheAtlantic, Megan McCardle, argues,“Institutions like insurance companies have strict regulations about thequality of the assets they can buy, and S&P ratings, among other things,are the proxy that we use to judge credit quality.”
Nevertheless, S&P didn’t exactlybreak any new ground here. A reasonably astute observer of politics, actually,scratch that, anyone that owns a TV and possesses a heartbeat, knows thatAmerica’s finances are in bad shape. The bigger, but underreported, news thisweek was that a group of nations are worried about the global impact ofAmerican debt, and are taking steps to counteract that threat.
Brazil, Russia, India, China, and SouthAfrica, together known as the BRICS, met this week to discuss plans for aglobal monetary shake-up in which the dollar would lose its status as the world’sreserve currency. The concern shared by these five nations, which together havedriven 45 percent of global economic growth since the financial crisis, is thatAmerica’s deficit could lead to rapid inflation that would destabilize worldcurrencies.
Reuters reports,
The BRICS are worried about thelong-term fate of the dollar because of America's large trade and budget deficits. They alsobegrudge the privileges that come with being the leading reserve currency --hence the call for a revamped system that is more stable.
In another dig at the dollar, the development banks of the five BRICSnations agreed in principle to establish mutual credit lines denominated intheir local currencies, not the U.S. currency.
It’s hard to believe that we’ve done this toourselves. Years of reckless spending coupled with a lack of political will toreform our entitlement system have rightly ruffled a few feathers at S&Pand among emerging economic heavyweights. The warning shot fired by the BRICSnations should serve as a reminder that Washington must take immediate andsubstantial steps to reduce our $1.6 trillion deficit and $14.3 trillion debt. Losingour status as the world’s reserve currency would be a potentially disastrousoutcome.
As Washington Post blogger Ezra Klein explains ina new post, losingthat status means “we would lose the most important advantage our economy hasin the global financial system – and we’d probably lose it forever.” This,Klein says, “would lead to skyrocketing interest rates” that “would slow oureconomy and, in real terms, make it even harder to pay back our debt, whichwould in turn send interest rates even higher.”
Although Klein astutely recognizes symptoms, hedrastically misdiagnoses the disease. He argues that the biggest threat to ourcurrency is not long-term spending, but is the looming vote on the debt limit.He argues that any signal that we can’t come to an agreement on the debt ceilingmay cause us to lose our status as the world’s reserve currency.
Continuing on our current profligate path,spending taxpayer money with reckless abandon, is the true threat. Although thedebt ceiling will be raised, the vote must not come and go without significantreforms to our spending habits. Whether in the form of a Balanced BudgetAmendment or a statutory spending cap, something must be done to divertWashington from its unsustainable course. As we move forward you can bet creditrating agencies like S&P and the BRICS nation will be watching our actions,or lack thereof, carefully. Our spot at the top of the monetary order is notguaranteed. Hopefully Washington sees the writing on the wall, and stops actingas if it is.