The Debtor the World Still Bets On
For decades — through political upheaval and wars and wild bouts of deficits or inflation — the debt of the United States has always been rated AAA, the gold standard of creditworthiness by which all nations are compared.
That was true before President Obama published his budget on Monday, with its projections of huge American deficits over the next decade and beyond. Astoundingly or not, it was as true after those estimates were published. Of course, had it been the United States Widget Company projecting red ink as far as the eye could see, no one would lend it a dime.
The closest thing Washington got to a brush-back pitch was a warning from Moody’s, an investor service that rates the sovereign debt of nations: Without action to cut the deficit or a faster-than-expected recovery, the projections for the decade “will at some point put pressure on the triple-A government bond rating.” Nobody blinked — not Congress, not the White House, not the investors around the world who keep buying Treasury bonds to finance this year’s $1.6 trillion shortfall, at low interest rates.
What explains this oddity? Why is the world betting that the United States will overcome its political deadlock and solve its problems — believing, it seems, in the truth of Churchill’s biting quip that America will always do the right thing, after exhausting every other alternative? And how long can this aura of invincibility last?
Maybe a long, long time. One of the many things that makes the United States different is that it prints the world’s most important currency and can always print more — one reason investors in government debt remain confident they will be repaid, even if in dollars devalued by inflation or by changing exchange rates.
There is also value in being the one nation on which the world still depends for security. That helps explain why foreign investors, including China, can denounce American politicians, Wall Street bankers and sleepwalking regulators for creating the current mess — and still buy at the next Treasury auction.
This paradox of American financial exceptionalism was unusually clear last week. When the stock market shuddered on Thursday because of worries about national defaults, it wasn’t Washington’s mountain of debt that got everyone rattled. It was the plight of a handful of profligate spenders in Europe — notably Greece, Spain and Portugal — whose comparative foothills of debt suddenly made them dubious credit risks.
Each of those countries knows the meaning of “imperial overstretch.” But it’s been a few centuries since Madrid and Lisbon were centers of vast empires, and a lot longer for the Greeks. What brought them down this time was not global ambition but local gridlock, in which politicians could not, or would not, cut spending at a time of high unemployment and social need. Making things worse, they now are on the euro — meaning they can no longer print their own way out of the problem, either. And it is unclear whether their partners in the euro bloc can afford either to bail them out or to let them default.
“They have no easy option,” said Prof. Simon Johnson of M.I.T.’s Sloan School of Management. “They can cut spending or raise taxes.”
Their problems may be minor compared to those of Japan, a battered economic superpower that prints its own currency and whose newspapers, two decades ago, regularly published charts projecting when Japan might overtake America as the world’s biggest economy. The papers still run such charts, but now the question is when China will overtake Japan for the No. 2 spot (likely later this year).
Today, like Toyota, Japan’s government is having a braking problem — it can’t figure out how to slow spending on a rapidly aging population, and like everyone else has reacted to recession by hitting the spending accelerator.
But unlike America, Japan is no longer considered so indispensible.
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