The recent inability of US politicians to compromise have lead to US credit rating being downgraded. Add to that European politicians’ inadequate response to the debt crisis in the euro zone and it’s understandable markets are in turmoil.
Politicians all over the world really need to step up to the plate and do something drastic to reduce the risks to the global economy.
Is another time bomb ticking somewhere in the world?
The global system is now faced with having to adjust to the many implications and uncertainties of the once unthinkable loss of America’s AAA. US treasury bonds are actually rated lower than bonds issued by countries such as Britain, Germany and France.
China, the world’s largest holder of US debt, has condemned the “short-sighted” political wrangling in the US and are of the opinion the world needs a new and stable global reserve currency. Understandable considering the circumstances.
And I can’t help wondering if there is another time bomb waiting to explode somewhere in the world?
Politicians postponing the problems
There are economic solutions to economic problems, but so far politicians have just postponed dealing with the problems. Presumably hoping they will go away? Which, as we all know is unlikely. If anything they will, just like the US debt problem just did, get worse.
Hopefully politicians all over the world will now get their act together and coordinate efforts to start dealing constructively with the world economy. There is no avoiding sorting out the main problem of excessive sovereign debt. Until that’s done, any relief will be short lived.
S&P considering US politicians not able to govern properly
It’s interesting to note that credit rating agencies are still regarded as capable of judging credit worthiness despite their role in the sub prime crisis. Seems a bit like having drunk drivers policing the roads. Not least since their initial calculations were wrong by 2 trillion. But for some reason they are, and Moody’s will review US credit rating end of this month.
S&P are of the opinion that US policy making and political institutions have weakened and that it will have a negative impact of America’s sovereign debt and budget. They are for instance worried that the Bush tax cut will not expire end of 2012 because of Republican opposition to raise revenues.
Americans & Europeans tired of political games
Voters in both the US and Europe are unhappy with their elected leaders’ failures. But voters are part of the problem too. On both sides of the Atlantic voters want debt levels reduced but no raised taxes or cuts in government programs such as pensions and health care.
Understandable since it’s the fault of bankers and politicians rather than voters. But unfortunately all belts now have to be tightened. Otherwise the huge sovereign debts will not be reduced.
Personally I used to think the main reason for the US debt was the wars in Iraq and Afghanistan. But according to The New York Times the main reason is loss of revenue due to the Bush tax cut, followed by the costs of those wars.
Unfortunately US voters will most likely be affected by S&P’s cut of US credit rating since borrowing costs will increase not only for the American government but US companies and consumers as well.
Could the EU rescue both Spain & Italy?
Governments aren’t doing a good job but politicians move slowly because they have to please voters in order to get re-elected. They can’t afford to make the mistakes the financial markets and credit rating agencies made by, for instance, underpinning sub-prime loans in the US and Greek borrowings in Europe.
In my opinion nothing politicians have done before or during the financial crisis since 2007 can match the mistakes made by the financial markets and credit rating agencies.But unfortunately S&P’s decision to downgrade US credit rating could prove to be the trigger for another financial crisis that sends the US and other western economies back into recession. However, that does not change the fact that politicians need to get their act together and deal with the problems facing not only their own country but consequently the world economy. The fact that US politicians recently were unable to do so resulted in their debt rating being down graded.
Photo: The United States Government Work – Flickr