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So the USA has lost its prized asset AAA credit rating which it has held since 1941. That’s 70 years and that’s a long time and it got me thinking about what this downgrade actually means.
It’s also got me thinking about whether the US can borrow its way out of trouble. Again.
OK, so for those of you who have been on a very long summer holiday let’s have a quick re-cap of what’s happened over the pond. On 5 August 2011, the ratings agency Standard & Poor’s (S&P) downgraded the US’ Government debt rating from AAA to AA+. This came a week after a deal to raise the amount of money that the Government could borrow went right down to the wire and followed a long drawn out standoff between the Democrats and Republicans that resembled a scene out of an old Western movie. The deal signed in the last chance saloon didn’t do enough to ease S&P’s concerns about the US’ budget deficit and rising debt burden. Whenever the US has hit hard times before, it’s always just borrowed its way out of trouble but there’s now a slow and agonising realisation in Washington that debt doesn’t simply wash away.
In the States, the net result of the downgrade will probably lead to higher borrowing costs for not only the US Government, but also companies and consumers as well as sucking the confidence out of American investors. France is AAA rated and has a similar level of Government debt to the USA as well as similarly low growth prospects. But if S&P are effectively saying that the US isn’t as safe as it was surely it’s the same for France and surely it’s the same for every country rated below the US? The reality is nobody knows what was behind the S&P downgrade but the move led some officials within the Obama administration to accuse S&P of moving the goalposts. Now, i’m not saying that S&P will treat one country differently to another but such questions are bound to be asked when it’s only the USA that’s picked on. And why did the president of S&P, Deven Sharma, announce his resignation only three weeks after the downgrade? Hmmm, answers on a postcard please. Whatever S&P’s rationale, the USA still needs to take action with its debt issues.
It seems the global financial system is stumbling down a spiral staircase at the moment and all of this uncertainty is making the staircase steeper. The US still powers the global economy, there’s no doubt about that. There’s also no doubt that no other country in the world can take America’s place at the centre of the global economic stage, not at the moment anyway. Although this could be seen as a significant stage in the East’s crusade to overtake the West as the global powerhouse.
The US can print as much new money as it likes, but that’s not made much difference so far in their quantitative easing programmes. Sure, the downgrade is a blow but it wasn’t a complete shock. What it tells us though is that the days of the USA just borrowing more and more money to get them themselves out of trouble are well and truly over. The days of seeing the USA as the safest investment on earth are over and with S&P raising the prospect of another downgrade in the next 12 to 18 things could get a lot messier. There’s only 14 months to go until the next presidential election and you can bet your bottom dollar that the downgrade and debt issues are going to take a headline slot on the election circus. The rest of the world will just have to take up a seat and wait for the show to unfold.
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About the author
Ryan Medlock
Investment Development Manager
Ryan’s remit includes speaking investment matters at IFA events, regularly contributing to the Scottish Life Website and trying to beat his colleagues in the fantasy fund manager competition.
Stay up to date with Ryan (@ScotLifeInvest) on Twitter.
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