As expected, the war of nerves – some see it as shadow-boxing – has ended at the 11th hour, with the US House of Representatives passing a Bill to increase the country’s debt ceiling and U.S. President Barack Obama signing legislation designed to reduce the fiscal deficit by more than 2 trillion US dollars over 10 years.
The very next day on August 3, the Dagong Global Credit Rating Co. of China lowered the credit rating of the United States. “The increase in the debt ceiling does not change the fact that the growth of the US national debt has surpassed that of its economy and tax revenues, which will reduce the willingness to pay debts”, the agency said in a statement. American credit rating agency Standard & Poor’s (S & P) followed suit by reducing the rating two days later.
The Chinese concern is understandable. As the world’s largest holder of dollar bonds, it is the biggest creditor of the US. Naturally other nations are also worried. Under the impact of mounting concerns of a global recession, financial markets worldwide saw the worst fall since the financial crisis of 2008, even as the Dow Jones Industrial Average fell 512 points and more than USD 2.5 trillion were wiped off the value of world stocks.
The markets crash is not simply a short term psychological reaction to the rating downgrade. It has to do with the medium and long term implications of the “debt deal” or austerity measures agreed between Democrats and Republicans.
On one hand it is a bipartisan conspiracy against the working people of America, envisaging as it does a major attack on jobs, wages, medicare and other benefits and social programmes. Already the people are battered: according to latest Census Bureau data, average US household wealth declined by 28% between 2005 and 2009. This represents a loss of $27,000 per household. Currently, at least 62 million Americans or 20% of US households have zero or negative net worth. The new cuts, imposed under the convenient phrase “living within our means”, will further worsen the situation of the middle classes and the poor and they have good reason to get worried and angry.
On the other hand, reduced purchasing power and creditworthiness of the vast majority of Americans also means a shrinking market. And this worries the corporate world, even though they are happy that the deal leaves their tax cuts, subsidies, and major government orders untouched. Voicing their concern about the effect the cuts would have on employment, a Moody’s analyst pointed out that the deal “calls for a yearly average of $240 billion in cuts over the next decade. Very roughly, that suggests the new plan would cost around 1.6 million jobs per year during that time.”
So the austerity deal is bad for people on the main street; it is bad for the economy too. To look for the more fundamental cause, obviously the villain of the piece is the rapidly rising US national debt. There are three major reasons behind this. First, the superpower syndrome, calling for huge military expenditure, has increased government spending dramatically. Second, major tax cuts for corporations and the rich since the 1970s and especially since 2000 have reduced revenues considerably. Third, costly bailouts of greedy, reckless banks, insurance companies and other large corporations since 2007 have sharply expanded government spending.
With less tax revenue coming in from corporations and the rich (the richest 400 Americans paid 30% of their income in taxes in 1995, but they now pay only 18%) and more spending on wars and bailouts, the government had to borrow the difference. And it will continue to do so in the years to come because the “plan” arrived at by President Obama and the Republicans does not remove any of the three major causes mentioned above.
Washington is able to thrive on borrowed money because its own national currency is also the international currency. As the Russian Prime Minister Vladimir Putin pointed out during a discussion on the current financial turmoil, the US “carries an overdose of the weight of debt in the world economy. It is a parasite and a sponge on the global economy using the monopoly of the dollar”. In fact this is why China, Russia, Venezuela and some other countries have been advocating gradual replacement of the US dollar by Special Drawing Rights (SDR) of the IMF as the world currency. That demand will gain new strength now.
As we go to press, turmoil on the bourses of the world – India is no exception, the brave face put up by the Manmohan-Mukherjee team notwithstanding – is getting worse by the day. The very partial recovery achieved at the cost of large doses of bailouts already seems to be petering out, as Marxists predicted it would.
