But Friday’s announcement by Standard and Poor’s of a one notch downgrade of US government securities from “AAA” to “AA+” captures the current moment fine. This is more a political denouncement than just an evaluation of fundamentals. Because from the statement of S&P’s, it’s clear that the decision to downgrade stems mainly from the prevarications of the US legislature to enhance the debt limit of the US government well in time avoiding acrimonious catfights along party lines. The credit rating agency chairman, John Chambers, has publicly stated as much; “the US could have averted a downgrade if it had resolved its congressional stalemate earlier. The first thing it could have done is raise the debt ceiling in a timely manner so the debate would have been avoided to begin with'.

Sweet revenge for credit rating agencies, amongst which S&P’s holds the premier position, for their widespread denunciation in the wake of the discovery of the toxic assets which were rated high by them and the threat from legislators to bring about laws to control and bring transparency in their operations.

Polemics apart, the basic arguments of S&P’s downgrading runs on certain economic arguments. First of all, the rating agency fears that US budget deficit will keep on rising from now through 2015 to 2021 when other sovereigns ion the “peer group”- they’re only four, Canada, Germany, UK, France- are likely to show marginal fall in public debt to GDP ratios while Canada has the lowest public debt to GDP ratio at 34%, 80% for UK, 79% for the US and the highest ratio of 83% for France. However, either before or by 2015, the debt burdens of the others are expected to fall but that of US will keep rising. S&P’s analysis indicates that US’s net public debt burden will increase from 74% of GDP in 2011 to 90% in 2015 and to 101% in 2021. Noteworthy, fact is that S&P did not consider China in the peer group for comparing debt to GDP ratio. An overwhelmingly large economy, China has far lower debt to GDP ratio. Maybe, it is so incomparably in a better position that S&P must have reckoned such comparisons frustrating.

Secondly, what is more important is not just the stock of public debt to GDP at discrete points of time but the potentials of growth and growth performance of an economy. A debt burden can be carried and rectified provided an economy maintains a growth momentum. This goes against the developed Western countries. Excepting Germany, none of them is growing fast enough to carry a large debt burden. The USA is growing, by the latest figures, is showing sub-par performance on this score. The agency has noted the latest quarterly growth figures as well as the trend growth rates of US economy since recovery began after the financial meltdown. The agency has observed that the recession following meltdown was deeper than previously assumed, therefore, its impact on recovery has been such that the growth rates turned out to be more moderate than projected earlier. Additionally, given the deleveraging happening in the US economy, the demand remains repressed and so also growth. S&P expects 2.5% growth in GDP.

The third argument for downgrading is that the fiscal adjustment suggested as a condition for enhancement of debt limit is also inadequate. These involve, on the one hand, bearing government expenditure including cutting down social benefits and on the other, increasing tax revenues through either fresh taxes or raising rates. Significantly enough, these measures will be opposed by USA’s two major parties respectively: The democrats are opposed to deep cuts in social benefits; the Republicans are opposed to fresh taxes or rate hikes. So how does the fiscal arithmetic work out?

Leaving aside the judgement of a credit rating agency for a while, there is a stalemate in the political economics of the world’s largest economy. And there lies the rub. The US situation has implications for the entire world and can be a cause for concern.

The most worried today would be China because it has invested all it’s surplus from a distorted and extortionary trade into US dollar denominated government securities. For three decades, China has denied fair wage to its workers, ran virtually slave camps of industrial workers, denied interest rates and returns to its domestic savers, given rock bottom interest rates to its exporters for the sole reason of selling its products cheap in the USA. It has ran annual trade surplus with the US amounting as much as the GDP of smaller nations. It now stands to lose all that wealth from a depreciating dollar in the wake of USA’s fiscal quagmire. Not surprisingly, China has rushed in with its comments, “(We) have every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets. International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country'.

United States need not worry over much because unlike China, which has relied mainly on reverse engineering and exports, the USA still continues to be the world’s innovation hub and has the biggest domestic market. The US might have suffered from the excesses of mildly regulated financial sector but the principal drivers of its real economy are still intact. US manufacturing sector is emerging afresh and, by and large, all the innovative new economy products are still coming out from that country. The financial markets also have shown their trust in the US economy, in the sense, that while the markets tanked suddenly middle of the week, these quickly recovered by Friday- the day S&P cut US rating. Us stock market may just as well show resilience next week. What is really worrisome for the world economy is the state of old Europe. The fiscal problems of European Union countries can hardly be resolved without large scale defaults and in most of these countries, growth has been stifled. Greece, Ireland, Italy are shrinking. It will be difficult to hold the euro together. What is important is to resolve the European crisis for global economic stability.

At any rate, the western economies are undergoing some fundamental restructuring in response to the changing demographics of their population. The economies are adjusting to an aging society in which there are a rising number of idle people than productive ones. Possibly, a new model of capitalism will have to emerge to take care of this. That is, of course, a different discourse. (IPA Service)