It’s difficult to argue with the Standard & Poor’s assessment of the U.S. fiscal outlook, or with their downgrade of the U.S. long-term sovereign credit rating:
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: [the S&P report]
The ratings agency takes the view that even if the “failsafe” cuts in the Budget Control Act Amendment of 2011 (passed August 2)—which appear to lock-in savings of $2.1 trillion in 2011 with or without further Congressional action—are made, they will leave long-term fiscal imbalance problem will be almost untouched.
[N]et general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act’s revised policy settings.
A U.S. Treasury official disputes the S&P assessment on the basis that the analysts over-estimated the projected public deficit in the next ten years and thereby underestimated the positive impact of the $2 trillion cuts in that period of time (by 8%). But I agree with S&P that this, in itself, is no reason to maintain the highest sovereign credit rating for the U.S.A. The budget-strategy process over the past months has lacked credibility; that’s what deserves the downgrade.
Of course, this ratings downgrade tells us nothing whatever about the United States economic recovery capacity only that public debt will probably be a continuing burden on that recovery and future growth. But bearish sentiment from the downgrade does have potentially real impact.
The good news is that U.S. firms are cashed-up to the extent that banks are bursting with cash: US bank holdings of cash have increased by 83 per cent (to $1,980 billion from $890 billion) so far in 2011. Also, foreigners are being offered some unbeatable opportunities to contribute to the U.S. recovery: dollar assets and exports are at a remarkable discount.
The bad news is that all that cash in the bank becomes a “liquidity crisis” if it is not mobilised soon. That, however, requires confidence in the demand outlook for this year and next that is in shorter and shorter supply.