It should have come as no surprise to anyone that the ‘resolution’ of the US debt ceiling crisis was belatedly greeted with the proverbial tumble on equity markets. The proximate cause may have been the downgrade of the US’ credit rating by Standard and Poor’s, an organisation whose influence was, of course, not unrelated to the GFC in the first place.
At the same time, the Eurozone continues to embody the pathologies of austerity economics, in large part because German politicians are unwilling to foot the bill for a bailout. Ironically, Germany’s relatively favourable economic performance, and particularly its export performance, is largely underpinned by a Euro much weaker than a Deutschmark would have been in the absence of a single currency.
In another intriguing development, China’s official Xinhua News Agency has released a commentary on the US’ political and economic posture:
“China, the largest creditor of the world’s sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets,” Xinhua said.
China also said further credit downgrades would very likely undermine the world economic recovery and trigger fresh rounds of financial turmoil.
“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,” Xinhua said.
For a long time, China has been happy to maintain the Yuan at a relatively low level, and to be the largest holder of US Treasuries. Fueling the American consumer spending and housing bubbles (also supported by the securitisation of debt which provoked the GFC) enabled it to maintain the American consumer as purchaser of low cost Chinese goods.
Clearly, this is no longer a viable strategy, as the US’ turn towards austerity economics is likely to see demand continue to contract, and that contraction accelerate. The degree to which the US state can act as purchaser of last resort is now also highly compromised.
Chinese authorities have also observed a flight of low wage manufacturing to neighbouring countries such as Vietnam, and a concomitant difficulty in disciplining a no longer rural workforce and holding down wages. The Chinese Communist Party now sees its continued rule predicated on social and political stability, which can, in their mind, be fostered through a turn to internal consumption.
It’s significant that the Xinhua statement called for a reduction in military expenditure by the US. Political and military power lags behind economic power, but the bill falls due.
This could be the way the hegemon ends, not with a bang but with a Tea Party.
Update: John Quiggin on S&P and the ratings agencies.