A Rainy Day for the Economy
Aug. 5, the United States’ credit rating was downgraded by Standard & Poor’s (S&P) from AAA to AA+. S&P is a company that creates ratings for countries internationally to indicate the value of owning that country’s debt, investing in its stock market, and other related monetary maneuvers. While there are multiple companies that create these sorts of ratings, S&P is perhaps the most well-known of what are considered “The Big Three” in the credit rating industry: S&P, Moody’s Investor Service, and Fitch Ratings.
The downgrade certainly got a lot of media attention, as it was a slap in the face to many who consider America still the strongest economic power. Now, several countries officially outrank us, at least according to S&P, including: Australia, Canada, Hong Kong, Liechtenstein, Luxembourg, and the Isle of Man. Some consider the credit ratings to be only a loose compilation of unrelated facts, with insufficient regard for a country’s reputation, dollar hegemony (the power or influence of a currency, based on factors such as how many countries invest in it), and significance to international markets. After all, the United States is probably more crucial and credible than Liechtenstein.
However, others argue that the credit rating downgrade is an accurate reflection of the state of the country, particularly with respect to the massive American debt — over $14.5 trillion overall, almost $47,000 per citizen — and the inability of Congress to reinvigorate the economy. The Bloomberg Consumer Confidence Index, another indicator of the economic failures, gave the U.S. its lowest rating since March 2009. In addition, wage gains are failing to keep up with inflation, and unemployment is around 9%. A recent poll by PressTV of 39 economists put the chance of another downturn at 30%, and projected economic growth to be only around 2.5% in 2012, a decrease from the projected growth rate of 3.1% that some economists declared in April.
The press release with the announcement of the downgrade remarked that it “reflects [S&P’s] opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in [S&P’s] views, would be necessary to stabilize the government’s medium-term debt dynamics.” That comment is an allusion to the recent debt-ceiling fiasco, in which Republicans walked out on negotiation talks led by Vice President Joe Biden, over increasing the amount of debt the federal government is allowed to hold. After lots of mud-slinging, speech-making, back-door compromises, and cut-backs on key parts of the legislation, it finally passed. The congressional fights were so intense that it was cited as an independent reason for the credit rating downgrade; S&P remarked that they had “changed [their] view of the difficulties in bridging the gulf between the political parties over fiscal policy.” As a result, S&P indicated that they were “pessimistic about the capacity of Congress and the Administration to be able to leverage [the debt ceiling agreement] into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.” In other words, S&P believes that our government is now so dysfunctional that we don’t have the ability to govern anymore, that “the effectiveness, stability, and predictability of American policymaking and political institutions have weakened.”
What does this mean for our economy? Will countries stop buying up American debt? Probably not. But the credit downgrade certainly has not helped anything. Since it occurred, the stock markets have been plummeting, although there has been a little bit of recovery recently. Low consumer confidence levels combined with aggressive media coverage of economic failures originally exacerbated the downward trend and could continue, at least to some extent, for the next few months. Those who are investing tend to be putting their money towards bonds — a counter-intuitive response to a credit downgrade, but a slightly safer bet than the stock market because it is less susceptible to major fluctuation. International markets aren’t faring any better; since many countries have invested in the U.S. there’s a slight domino effect from any major failure here. In addition, many European countries are experiencing major economic turmoil. Italy, Spain, and Greece, for example, are having serious issues, and France and Germany are struggling to keep them afloat. The combination of European Union and U.S. failures have tanked Japan’s stocks as well.
There isn’t much that America can do, either. The Federal Reserve fears inflation, so they can’t engage in techniques like quantitative easing (which would just be round three of bond-buying.) There’s too much political turmoil, and certainly not enough money, for many more bailouts. And the Obama Administration is quickly losing political capital and popularity as the economy tumbles. The difficulty isn’t close to being over, either. The debt ceiling deal was basically a procrastination measure; the government will have to re-discuss some details. If the fights happen again, and we don’t manage to pass a comprehensive package, there could again be the possibility of a government shutdown or defaults on U.S. debts, fears that cropped up during the debt ceiling debates this summer. Either of these measures has the potential to be even more catastrophic for the economy.
A default, the worst case scenario, would have a high likelihood of majorly impacting China’s economy, in turn destabilizing Asian markets that rely on it. In the midst of all this concern, economic measures such as the free-trade-agreement package including agreements with Korea, Colombia, and Panama, are unlikely to gain any more traction because of a spike in protectionist sentiments. The economy will almost certainly be a significant discussion point in the upcoming 2012 elections, and gives the Republicans, at least in the beginning, an edge. However, whether Michele Bachmann leads in polls or Obama’s approval ratings shoot back up, Democrats and Republicans need to do a much better job of cooperating if anything is going to be solved, and if they are going to disprove S&P’s accusation that American politics are incompetent.
By Lauren Sukin, Opinion Editor ’12