Friday, 12 August 2011 13:58
And I thought the Philippines’ corrupt politicians are the worst. It turns out America’s own “dysfunctional politicians,” as global rating agency Standard & Poor’s describe them, can destroy this great nation just as badly as highly contentious politics tears the Philippines apart on a regular basis.
In downgrading the United States’ credit rating for the first time ever from a perfect AAA rating to AA+, Standard & Poor’s said “political dysfunction” provoked the downgrade, noting that Congress seems to lack the ability to aid the weakening economy.
“Even though lawmakers reached a decision on Aug. 2 to raise the government’s debt ceiling and avoid a potentially disastrous default, the deficit-reduction package that accompanied the deal won’t sufficiently improve the government’s fiscal health in the coming years,” S&P said in a statement explaining its decision to downgrade the US’s credit rating.
S&P particularly cited the Republicans’ seeming unwillingness to allow the Bush-era tax cuts to expire. “The majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act,” S&P said, referring to the Budget Act of 2011 that enabled the US to evade defaulting on its $15-trillion debt but left many economic experts worrying about the country’s economic future.
S&P added that its analysts “have changed our view on the difficulty in bridging the gulf between political parties over fiscal policy, which makes us pessimistic” about any improvement in the country’s credit posture.
A few weeks ago, S&P had already warned that it may lower the long-term US credit rating one or more notches in the next three months “if we conclude that Congress and the Administration have not achieved a credible solution to the rising US government debt burden and are not likely to achieve one in the foreseeable future.”
But the politicians on Capitol Hill were either not listening, were too arrogant, or were too engrossed in playing power poker politics in preparation for the presidential elections next year, that they locked horns until just a few hours before the default deadline on Tuesday, August 2, before finally coming out with a debt deal that was so tentative and so inadequate, it raised doubts on Washington’s resolve to come up with a long-term solution to the country’s gigantic debt problem.
For weeks, the Democrats and the Republicans traded barbs over their own versions of the debt solution. While both agree on raising the debt ceiling, the Republicans wanted drastic spending cuts and no new taxes. The Democrats, on the other hand, wanted less spending cuts, the tax cuts granted during the term of President George W. Bush removed, and wanted new taxes that would target business and the wealthy.
Democrat Senate Majority Leader Harry Reid said the proposal by Republican House Speaker Boehner was a “short-term solution” that would be “dead on arrival in the Senate, if it gets out of the House.” Boehner, on the other hand, called Reid’s blueprint a “blank check” for more uncontrolled spending that would undermine the economy.
Democrat House Minority Leader Nancy Pelosi accused Republicans of trying to “undermine government” and “destroy” vital programs. Conservative Republican Senate leader Mitch McConnell said President Barack Obama was “clinging” to hope for a “massive tax hike.”
Obama’s own rhetoric in a nationally televised appeal for compromise touched off the exchange of barbs. “This is no way to run the greatest country on Earth,” Obama said. “The American people may have voted for divided government, but they didn’t vote for a dysfunctional government.”
Obama also ripped House Republicans for stubbornly pursuing a “cuts-only approach” that “doesn’t ask the wealthiest Americans or biggest corporations to contribute anything at all.”
The Republicans’ hard stance during the debt negotiations was seen by one political pundit as an obvious attack and disrespect on America’s first black president. In his column on USA Today, DeWayne Wickham wrote: “What should be clear to the whole world watching the debt-ceiling battle is that the Republicans are far more intent on taking the president’s scalp than balancing the nation’s books.’
With the presidential elections on the horizon and the Republicans and the Democrats expected to continue their political tug-of-war over the issue of debt ceiling, budget cuts and taxes, a long-term solution to the US’s debt problem may not be coming in the near future. The Republicans wouldn’t want to budge and give President Barack Obama additional ammunition in the campaign after his success in eliminating Al Qaeda leader Osama bin Laden. The Democrats, on the other hand, are also eyeing next year’s election and wouldn’t budge either.
If this tug-of-war persists and nothing is done about the debt problem and the huge budget deficit, it wouldn’t be farfetched to imagine the two other global credit rating agencies, Fitch and Moody, to follow suit and also downgrade the US credit rating, which would definitely send both the US and global economy into another recession, possibly into depression, just two years after barely emerging from the 2007 recession.
Even before the S&P downgrade, investors were already panicking mainly because of unfavorable economic indicators, an economic growth that has slowed down to near-zero level, reduced consumer spending, lower manufacturing output, and a nearly stagnant employment situation, and partly because of the politicians’ failure to resolve the debt impasse. On Wednesday, the stock market plummeted with the Dow Jones Industrial Average dropping 512 points, the lowest since 2008.
On the first trading day after S&P announced its downgrade, the Dow fell by 634 points on Monday, the sixth worst trading day in history.
Economists fear that the downgrade would eventually raise interest rates, including those on mortgage, car loans and credit cards. With the US economy dependent on credit, the further tightening of credit would further slow down the economic wheels and drag the country into a double-dip recession that economist fear would be worse than the one that struck the country in 2007.
In the meantime, the Republicans are busy preparing for its primaries and the Democrats are intent to stop them every step of the way.
The S&P report was criticized by Treasury and White House officials but was accepted by many economic experts as a true assessment of the ability and resolve of the government to solve its growing debt burden. The credit rating downgrade has correctly measured the government’s willingness to pay its debts, its resolve to do something about its financial situation, and to show the world and its creditors that it deserves its trust and confidence, as one analyst puts it.
It is a bitter pill to swallow, but the comments by China, which holds the biggest amount of US Treasury bonds, should be given due consideration. The official Xinhua news agency said Washington must “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. To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means.”
The S&P downgrade should serve as a wake-up call to Washington that it should get its act together very soon and review its spending habits and tax policies, before the world’s economies lose their trust on the American economy, and turn to other currencies as safe haven for their foreign reserves.
China, for one, is questioning the dollar’s status as the world’s dominant reserve currency, saying “a new, stable and secured global reserve currency may also be an option to avert a catastrophe called by any single country.”
Philippines Finance Secretary Cesar Purisima agreed with China, saying the downgrade “highlights the need for alternative global reserve currencies and benchmarks that are more stable and as liquid and convertible.”
Washington politicians must find a way out of this mess, and soon. They cannot allow their extreme stands on the national debt, spending and taxes destroy the nation in the same way that the opposing stands of the Northern and Southern states on slavery plunged the country into a bloody civil war in 1861.
By Val G. Abelgas
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