US Debt Crisis Just Beginning

Last modified on August 3rd, 2011

The senate passed the deal to raise the debt ceiling today, which means the United States can pay their bills and not default. But truthfully, that’s probably the worse thing that could have happened, since the US has delayed dealing with some very hard problems.

First, let me comment on the ratings agencies. Right after a deal was announced, two of the three major rating agencies reaffirmed the United State’s AAA credit rating. These are the same ratings agencies that also gave AAA ratings to the credit default swaps and other securities that were the underpinnings for the 2007-2008 financial crisis. Saying the United States is in good fiscal shape is like saying Icarus was the world’s best astronaut.

S&P hasn’t weighed in on their rating yet, but I suspect they’ll give a AAA rating as well. It doesn’t really matter – either way the markets have reacted negatively and are punishing US stocks.

I came across this video tonight, and I agree with almost all of it. The only part I don’t agree with is that the Euro is the only currency that can compete with the USD – several proposals involving a basket of currencies have gained a notable following, and I imagine that’s what will eventually take the place of the US dollar.

If the US didn’t have reserve currency status, they would be no better than Greece or Spain, and we would be treating them the same. All they’ve done with this current effort is to kick the can down the road, and it will be undoubtedly a harder problem to solve when it is addressed. And let’s not forget that this whole debacle was basically dealing with the current deficit, the actual debt hasn’t even been discussed yet.

I agree with Peter Schiff: the crisis wasn’t that the United States wouldn’t raise their debt ceiling, it’s that they would. Now they have repositioned themselves to head down the same path that other countries like Argentina and Zimbabwe have traversed, and in both of those cases, the currency and the economy were destroyed in the process.

** Update – China announced they have downgraded US debt. Thankfully their ratings agencies aren’t as clueless at the US ones. Guan Jianzhong, chairman for the Dagong Global Credit Rating Company, has this to say:

“The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States’ declining ability to repay its debts. The two parties acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals.

Our downgrade simply reflects reality. Our rating didn’t cause China to lose any money — it was the inappropriately high ratings for the U.S. by Western agencies that had led China to make risky investments in U.S. debt.”