It will likely take a full-blown crisis to divert the United States of America, once the world's greatest nation, from its fiscal death march. A credit rating alert from Standard and Poor's rattled the stock markets Monday, but it was far from a crisis-triggering event.
Exactly what will tip the United States into catastrophic economic circumstances -dollar crash, default, market meltdown -is impossible to predict, but the trigger will certainly not come from credit-rating agencies. Their special talent is to arrive at the morgue and predict the demise of the deceased.
The United States has already forfeited its role as the economic leader of the world. Under the Obama administration's program of rising debt, soak-the-rich tax policies, spending expansions and regulatory overkill, America is already establishing itself as a fiscal and economic mediocrity.
At meetings of the International Monetary Fund over the weekend, Obama officials seemed happy with the knockdown in status. After IMF members took shots at U.S. policies, Treasury Secretary Timothy Geithner embraced the results. He said Washington welcomed "continued IMF surveillance of our fiscal and monetary policies." What a comedown for America, the world's fiscal and economic champion.
In its announcement Monday, Standard and Poor's was merely confirming the obvious, warning the world's investors of something that has already been part of the daily news flow. Barring a major turnaround in policy, at some point in the not-too-distant future the markets and credit agencies will be forced to lower America's standing in the world markets and knock it off its top-of-the-heap investmentgrade triple-A credit rating.
The S&P warning came with an authoritative-sounding assessment of risk: "We believe there is at least a one-inthree likelihood that we could lower our long-term rating on the U.S. within two years." Experts also say there's a onein-three risk of an 8.2 earthquake hitting North America's west coast within 50 years. To which most people say: So what?
The White House easily dodged the oddsmakers at S&P with some long-term mumble-speak of its own. Austan Goolsbee, chairman of the White House Council of Economic Advisers, dismissed the S&P rating alert as a statement assessing the political probability of the need for a ratings cut rather than looming fiscal reality. "I think we're going to raise the debt ceiling, proceed on this parallel track on deficits, and I don't think that the S&P's political judgment is right."
So there we have it, a battle of risk assessments between the accuracy of a statement regarding the three-to-one odds on a minor revision to the credit rating of the U.S. government by a ratings agency that has a long record of alerting the world to disaster after the disaster hits the fan. Maybe the stock markets fell Monday in frustration over the silliness of these formal declarations of pending adjustments to risk that the market has already begun to discount.
Warnings of a looming U.S. debt crisis, even default, have been heard for months now. Standard & Poor's and Moody's, another rating agency, have on several occasions said that the United States is on an unsustainable deficit path that will lead to rating cuts. "If there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase," said Moody's in January.
The point is that these rating warnings are immaterial. Even a rating cut would be meaningless in itself, since it too will come after the horse has left the barn. "The next step would be to lower the rating," said David Beers, S&P's global head of sovereign and international public finance ratings. A rating cut would take place if President Barack Obama and Congress fail over the next two years to draft a longer-term budget plan that will cut more than $4-trillion out of spending. The $4-billion cuts now contemplated by Washington is "a useful starting point," but it is "not enough," said Mr. Beers.
The world will know long before S&P gets around to cutting America's credit rating that America is in fiscal crisis. The markets will send the signals first, as they did when other nations have hit the wall. From Greece to Portugal today to Canada and Sweden in the 1990s, fiscal meltdowns have a way of creating their own triggers. Rapid increases in interest rates and plunging currencies produce the kind of crises that force politicians to act.
It was just such a looming currency crisis that forced Canadian governments to dramatically cut spending in the mid-1990s. As Canada's net debt soared to 70% of annual gross domestic production (GDP), the federal government tried to ignore the looming crisis. But the markets, by driving the dollar down, ultimately forced Ottawa to change course -and turned the big-spending Liberals under Jean Chrétien into fiscal conservatives.
The Obama administration is looking toward the same fate. The United States, facing possible total government debt of up to 90% of GDP by 2013 if action is not taken, is clearly on the brink of crisis. It is not there yet but, as with earthquakes, we will know it when it happens.
tcorcoran@nationalpost.com
