So, it has happened. Americans, especially the government, will not see it this way, but this may turn out to be a good thing. For too long the United States has followed a financial policy that is potentially ruinous. Spending up to twice your income and borrowing the rest. Always the mantra is that you pay back debt out of growth, but always the reality is that the borrowing grows at least as fast as the growth. The instigator of this mis-guided and dysfuntional economic theory was Ronald Reagan. History will not hold him in the same affection as the American people hold him now.
His brand of Reaganomics was followed by the two Bushes over three terms. Clinton bequeathed a balanced budget. It is therefore very ironic that the Tea Party is a movement within the Republican Party, as it is Republican Presidents who have done the most damage. It is true that Obama tried to spend his way out of trouble, but that cannot work in an economy hopelessly over spent already.
However it is not the details of the figures which are the cause of the current crisis or the downgrade. It is the realisation that the Western economies, which owe more than 70% of all the money owed in the world, have borrowed too much to repay in full. The cuts needed to make repayment possible will, coupled with the huge and rising interest bills, make such a drag on the economic activity of the countries involved, that something will have to give. Add to that, the complete dysfunctionality of the U.S. model of government in a crisis of this magnitude and nobody can see with clarity what can be done nor what will be done.
Here there is a sharp paralell with Europe. The political deadlock and inaction at the heart of European governance of the Euro is the primary cause of the mounting anxiety that, not only are the debt levels unsustainable, but nobody is able to agree what to do.
Enter an angry China. This is not good enough, they tell the humiliated Americans. The UK should be saying something similar, because of the rarely reported fact that we are the third largest holder of US debt, $.35 trillion in fact. There is also some synergy between the British and Chinese. Britain’s muddle of a Constitution is only a limited democracy. The advantage is the ability to enjoy stable government which is empowered to take decisive action. China’s Communist capitalism can deliver the same, decisive government. So for that matter can Putin’s Russia. Between them Russia and China now hold, on the latest July 2011 figures, $3.7 trillion of reserves between them, of which China’s share is now an eye popping $3.2 trillion. The UK needs to start looking East.
Meanwhile both the US and the Eurozone have to sort out their governance issues. Failure to do so will cost the Euozone the Euro and America control of the dollar.