As Standard & Poor’s downgraded the long term credit rating of United States from AAA to AA+, the icon of world economy, the American Dollar plummeted vicariously,shocking and shaming its votaries. It again did a freefall on the news of yet another downgrading.
The rating agency explained its downgrading move to the fact that the political parties have failed to work out a credible plan to solve the problem of $14 trillion US internal debt.The agency held that the political parties are too polarized to come in grips of the fiscal deficit and debt overload.
S & P maintained that the fiscal consolidation plan that the White House and the Rebublicans inked to cut spendings by $2.1 trillion was too little and too late.
The credit downgrading was an unprecedented though not unexpected move by Standard & Poor’s.
It was the first time that the US was downgraded since it received AAA by Moody in 1917. It has held the S & P ratings since 1941.
Credit downgrading will imply increased borrowing cost for the US government and consumers and businesses.
The slashing of credit rating of world’s Big Brother by a private ratings agency has undertones of irony.
The McGraw Hill owned agency has no public mandate to call its own. It is a pure business concern involved with the ratings of financial instruments and debtors worldwide.
It’s word is law. This is because the agency has hardwired its rating system with international banking norms. But S &P is not infalliable. Earlier it had been pulled up by the European Union for biased ratings.
Even in the current scenario it is charged with a ‘$ 2 trillion flaw’ in calculating the US debt unworthiness.
Nobel Prize winner Paul Krugman sums it up pithily. ‘ The people who rated subprime-backed securities are now declaring that they are judges of fiscal policy.’
Obama is in an unenviable position. With the presidential elections just two years from now he could have well done without the rating cut.
There is much mud slinging on the onus of the debt mess. Republicans no-tax policy, their reluctance in plugging tax loopholes and the decade old tax cut program of George W Bush are in for a blame.
Background of the current debt overload can be traced to the George W. Bush regime.
In February 2001 Bush initiated a $ 1.35 trillion tax cut program, and held that in the next ten years the surplus will stand at about $ 5.6 trillion.
Most debt accumulated due to what is now known as the ‘Bush tax cuts’ and deficit financed wars.
Bush’s calulations were also mislaid when in December 2007 United States entered the longest post-World War 2 recession which included a housing market correction, a subprime portgage crisis, soaring oil prices and declining dollar value.
Further the collapse of Lehman Brothers and that of the US state-backed housing finance providers, Fannie Mae and Freddie Mac shook the foundations of the American financial system.
The response of the governments around the world to the financial crisis and recession was to increase public spending, at a time of falling tax revenues, to compensate for the collapse of household consumption and private sector investment.
This artificial proping of the financial system was to prove dysfunctional and public debt cascaded.
There is a clear cut ideological difference between the two parties. The Republicans are in favour of spendings cut instead of tax hikes. The Democrats hold that spending cuts affect the poor , and argue for taxing the rich.
This difference in stance led to aggravating of the crisis.
The Republican and the Democrats were unwilling to go in for harsh spending cuts and they shrugged off the onus unto joint commitees formed for the purpose. Even here the policy deadlock continued. Finally Republicans had their say and a blueprint of anti-inslovency action was chalked out. They came out with a $2.1 trillion cut plan which the agency thought to be ‘too little, too less.’
The American debt issue is as much a financial as a political maliase.
In India things have been kept in check due to a continuity in economic policy of liberalization, which was initiated in July 1991 in response to balance of payment problem and dysfunctions of Licence Raj.
Though National Advisory Council has a penchant for populist spends, the mature Planning Commission has countered the trend.
Living within our means and foreplanning and course-correction can steer India from any debt trap.
