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Friday, October 18, 2013

Chinese rating agency downgraded United States debt

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Bonfire of the straw men
By Peter Lee

Per my personal transcript of the October 17 NPR Marketplace, the popular, liberal-leaning US radio business show, an exchange between anchor David Brancaccio and Shanghai correspondent Rob Schmitz took as its point of departure the temerity of a Chinese rating agency, Dagong, in downgrading US debt:

Lead in: ... While it doesn’t have the stature of Moody’s of Fitch, a credit ratings agency in China has downgraded the US even with President Obama’s signature on the budget deal last night ...

DB: [in a tone of polite disbelief]: So this Chinese credit agency downgrades the United States despite the fact that there was the big deal in Washington?

RS: It’s a vulnerable time right now for the US economy, and China and its rating agencies are in attack mode. Before the Dagong downgrade, we saw a pretty vicious attack on America‘s role in the world in an editorial written in Xinhua ... which declared an [airquotes] end to the age of Pax Americana [close airquotes].

DB: We saw in fact this full on pitch this week via Xinhua for making the Chinese currency the world’s reserve currency ...

RD: Of course, that is a dream world. The US dollar will remain the reserve currency of the global economy for the time being ... Third-quarter figures showed that China now has US$3.7 trillion in foreign exchange reserves. This figure represented the highest quarterly growth of Chinese investment in US debt in two years. While China’s rating agency that few people have heard of and some in Beijing are using this moment to go after the US economy, China remains more committed than ever in investing in the US economy and it’s certainly not putting its money where its mouth is in this instance. [1]
Wow. Defensive much?

A few things:

The offending piece in Xinhua was not an editorial, and not an op-ed; it was a signed commentary by one "Xinhua writer Liu Chang". It seems that Liu (if that’s his/her real name) has written occasionally on US finance and represents Xinhua’s contribution to the near universal trend to inject bloggy goodness into mainstream journalism. This article is probably the most recent sign of the apocalypse: not the Gotterdammerung of the US-debt fueled fiscal firestorm, but the Global Times-ization of the Xinhua web presence.

Even so, the "viciousness" of the "attack" was somewhat oversold.

Liu did not declare an end to "Pax Americana". He simply stated that "Pax Americana" was not delivering the goods - that is, the peaceful world it promised:
[T]he US government has gone to all lengths to appear before the world as the one that claims the moral high ground, yet covertly doing things that are as audacious as torturing prisoners of war, slaying civilians in drone attacks, and spying on world leaders.

Under what is known as the Pax Americana, we fail to see a world where the United States is helping to defuse violence and conflicts, reduce poor and displaced population, and bring about real, lasting peace.Moreover, instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas, instigating regional tensions amid territorial disputes, and fighting unwarranted wars under the cover of outright lies. [2]
Liu’s proposed solution to the problem, while presented under the infuriating label of "de-Americanization", was little more than the traditional PRC remedy for the ills of the world: respect for sovereignty, multipolarity, strengthened multilateral institutions, etc.

Second, the Marketplace team’s mockery of the Dagong downgrade contained a certain amount of whistling past the graveyard.

Certainly, some propaganda grandstanding is going on, but consider that the budget deal only kicks the can down the road to next year. The Tea Party is not sitting around criticizing its own ignorant presumption; it is selling a dolchstoss ("stabbed in the back" for you non-German speakers) myth to fuel its fundraising and, if it desires, schedule a re-run of the whole mess next February.

In order to forestall another cave-in by the Republican leadership to the Obama administration in the next confrontation, a right-wing radio stalwart took the position that Treasury default would be a nothingburger for holders of T-bonds and T-bills; according to this self-serving narrative, bondholders could get paid off on time and in full with tax proceeds, thus preserving government creditworthiness in the financial markets.

Presumably, no one would mind if government contractors get paid in scrip and social security and medicare beneficiaries just sucked it up for a few weeks without benefits.

Third, has anybody seen a call by the PRC to establish the yuan as the world’s reserve currency? Despite David Brancoccio’s observation, I haven’t.

The Liu Chang piece concludes:
Apart from that, the world's financial system also has to embrace some substantial reforms. The developing and emerging market economies need to have more say in major international financial institutions including the World Bank and the International Monetary Fund, so that they could better reflect the transformations of the global economic and political landscape.

What may also be included as a key part of an effective reform is the introduction of a new international reserve currency that is to be created to replace the dominant US dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.

Of course, the purpose of promoting these changes is not to completely toss the United States aside, which is also impossible. Rather, it is to encourage Washington to play a much more constructive role in addressing global affairs.

Just so we can get a few things straight, this is not calling for the yuan to replace the US dollar as the "international reserve currency".
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