At what point, some financial analysts ask, do rating agencies downgrade the United States?
By Daniel at 24 November, 2009, 6:16 pm
They don’t. They’re not foolish enough to incur the wrath of the government. At least no ratings organization based in the US is going to downgrade US sovereign debt. They don’t need to, though. Everyone able to do rudimentary math knows what’s going to happen.
When do lenders price additional risk to federal borrowing, leading to a damaging spike in interest rates?
As soon as there is a currency in the world issued by a government that is not going to prop up the dollar in order to maintain their trade surplus with the US. At some point, the (mostly Asian) nations just aren’t going to be able to continue propping up the dollar, however much they may wish to continue doing so. It is already clear that the US will have to monetize its debt. The point where there are other opitons has been passed, so even if the current administration keeps denying it through 2016, even in the unlikely case that someone other than another leftist Democrat gets into the White House in 2017, the policy of debt monetization will have to continue. The only other choice is default, and the currency will collapse in that case, too.
How quickly will international investors flee the dollar for a new reserve currency?
When it starts, it will go very quickly. The only thing needed is the same thing mentioned for the first question, namely a hard currency issued by a government that chooses not to prop up the dollar.
And how will the resulting higher interest rates, diminished dollar, higher inflation, and economic distress manifest itself?
It will be manifested the same way it was in Argentina and other similar countries. The current account _will_ be balanced, and since it is not gong to be balanced through either an increase in exports that exceeds any increase in imports, nor is going to be balanced through managed trade that ensures a balance, it will be balanced by the inability of the US to afford to pay for imports. The resulting decline in standard of living, driven by price inflation wildly outpacing wage inflation, will result in imports dropping enough to balance out exports, even if America’s trading partners fail to open their markets as the US has its markets. Of course, the desire to maintain the structural trade imbalances that have brought so many (predominantly Asian) nations out of poverty will mean that the last thing the US exports to the world is its inflation.
What other manifiestations will there be? Well, there will have to be a strategic drawdown, which will need to continue even if the ideologically driven weakening of US defense capabilities of the Democrat Party is reduced by electoral defeat. That, in turn, will result in geopolitical instabillity, which will further undermine the US economy. The American electorate _may_ elect some sort of fiscally conservative leadership that will attempt to impose an austerity program to try to restore some of America’s lost luster. However, they’ll quickly be thrown out again, having accomplished little, and a new debt bubble/monetization cycle will follow. To see the US of the 21st century, just look at Argentina of the 20th Century, and increase it by an order of magnitude or two. Then add in a power vacuum of the sort not seen since the collapse of Rome.
- Alex Temenid
No comments yet.