 S&P Points to Plain Problem |
| "Coin clipping has been resorted to many times since the time of the Romans, both by public and private con artists, prompting mints to mill the edges of gold and silver coinage to make clipping easily detectable. With the rise of modern banking and ..." | |||
| Written by Charles Scaliger, Wednesday, 24 August 2011 | |||
 In 1941, the United States was first assigned the so-called “triple A” or AAA rating, a reflection of the widespread belief, at least in the free world, that the United States government could be relied upon absolutely to pay its debts. At the time, the United States had recently grown into the world’s largest economy. The dollar, after the end of the Second World War, became the world’s reserve currency under the terms of the Bretton Woods agreement. Other hard currencies were to be convertible to U.S. dollars, which were in turn convertible (for international investors, at least) into gold (the so-called “gold exchange standard”). The general perception of the dollar as the world’s backstop currency and of U.S. government debt as being as good as gold survived President Nixon’s closing of the “gold window” in 1971 and the decade of economic malaise — which included significant inflation — that followed. This is surprising in hindsight because Nixon’s action certainly fulfilled the criteria for a partial default, being motivated by the inability of the United States to service debts incurred in the Vietnam War. In the rise of the euro, the U.S. dollar appeared for a time to have gained a competitor for an international currency — until the recent debt crisis in the EU. The ascendancy of economies like Brazil, China, and India, meanwhile, has created new international purchasers of U.S. government debt. With the European crisis spinning out of control, U.S. treasuries, yielding a very modest 2.34 percent for a 10-year maturity, are still very much in fashion. What, then, is all the fuss about? As Standard & Poor’s explained it:
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade....
In other words, Standard & Poor’s is unimpressed with the skimpy cuts agreed to by Congress, and expects that, in the face of political paralysis, the U.S. government debt will continue to rise sharply, making the likelihood of some sort of debt dilution — devaluing the dollars in which the debt is denominated, in other words — very likely.Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a “AAA” rating and with “AAA” rated sovereign peers.... In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging. A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand. Standard & Poor’s action has received a lot of publicity, but it’s far from the only sign U.S. creditors are coming to realize that their holdings of U.S. debt may not be as surefire as once imagined. Both China and India have made no secret of their intent to reduce their exposure to the U.S. dollar. Many other major investors, such as the celebrated Jim Rogers, have confidently predicted that the U.S. government, shorn of other options, will eventually try to print its way out of debt. And allegedly respected organs of opinion in the United States have even warmed to the idea. On August 9, for example, the New York Times ran an editorial excoriating the Federal Reserve for failing to take more robust action to combat the economic crisis. The Times recommended a number of countermeasures the Fed should use to bring the crisis and the national debt under control:
[The Federal Reserve] could reduce the interest it pays on the banks’ huge reserves or even tax the reserves to try to encourage more lending. It could also resume buying Treasuries or other securities to provide additional monetary stimulus. A more aggressive strategy would be letting inflation rise above the Fed’s comfort level of 2 percent or so to, say, 4 percent. That could help the economy by easing the repayment of debt. [Emphasis added.]
Coin Clipping Debasing currency is one of the oldest and most dishonest tricks used by monarchs and politicians to relieve themselves of the burden of heavy debts without inflicting ruinous taxes on their subjects and citizens. (Of course, the citizens must still pay in the end.) Roman emperors, lacking paper money and printing presses, engaged in “coin clipping,” trimming some of the metal off the edges of coins for resale elsewhere, all the while leaving the face value of the coinage unchanged. Merchants and bankers soon discovered the ruse, of course, resulting in the steady depreciation of the value of Roman coins, a process analogous to modern inflation. Coin clipping has been resorted to many times since the time of the Romans, both by public and private con artists, prompting mints to mill the edges of gold and silver coinage to make clipping easily detectable... Read more>> |
