One ratings agency isn’t mucking around. China’s Dagong has stripped the US’s A rating and put it on A-, an upper medium grade that is shared by nations such as Brazil and Panama:
1. The partial U.S. federal government shutdown apparently highlights the deterioration of the government’s solvency, pushing the sovereign debts into a crisis status. The U.S. federal government announced its shutdown on Oct. 1, 2013, a radical event that reflects the liquidity shortage aroused by depleting stock of debts without the increase of new debts, directly resulting in the federal government lack of the funds for its normal function. The partial U.S. government shutdown is an inevitable outcome of its long-term failure to pay its excessive debts. During the fiscal years from 2008 to 2012, the ratio of the federal government’s stock of debts to fiscal income increased from 4.0 to 6.6. Under such circumstances, the federal government that can hardly sustain its own expenses, not mentioning collecting reliable income to cover its huge amount of debts. Substantial decrease of the U.S. government’s solvency is proven by this shutdown incident, which pushes the federal government into a crisis position of debt cliff and default.
2. Since the outbreak of the U.S. debt crisis in 2008, the deviation between the federal government’s sources of debt repayments and the country’s real wealth creation capacity has been constantly broadened. The huge amount of government debts that lack the basis of repayment always stands on the brink of default, and this situation is difficult to change in the long term. The federal government debt stock increased by 60.7% between 2008 and 2012 when the nominal GDP increased by only 8.5% while the fiscal income decreased by 2.9%, which indicates that fiscal income is losing its means as the primary source of debt repayments. Because of the fact that the federal government now depends highly on borrowing new debts to repay its old ones, vulnerability of its debt chain is accumulated so that technically debt default may occur at any time. For the fundamentals of government debt repayment condition will not be essentially improved, the federal government’s debt cliff will persist in the long term.
3. Liquidity has been continuously injected into international financial markets from the U.S., which indirectly plays a key role in combating against the risk of government default. This implicit debt default behavior infringes upon the benefits of creditors. In order to avoid the debt default caused by the lack of debt repayment sources such as fiscal incomes, the U.S. government has been taking advantage of the international currency dominance of the U.S. dollar to monetize its debts and has been taking quantitative easing monetary policy to maintain its government solvency since 2008. The devaluation of the stock of debts hereby directly damages the creditors’ interests. Dagong estimates that the depreciation of the U.S. dollar caused a loss of USD628.5bn on foreign creditors over the years of 2008 to 2012.
4. The debt ceiling has been extended continually, increasing the total amount of the federal government debts. In order to avoid the sovereign debt default, it becomes an inevitable choice for the U.S. government to repay its old debts through raising new debts. The fact that the debts grow faster than the fiscal incomes will further impair the federal government’s solvency. Ever since Obama’s inauguration in 2009, the U.S. Congress has extended the debt ceiling for five times, reaching a total volume of USD5.1tn. This further raise of the debt ceiling shows the government’s incapability of improving its solvency by improving the basic economic and fiscal elements.
5. The Democrats and the Republicans of U.S. do not have a consistent strategy target to solving the sovereign debt problem. As the issue of paying sovereign debts falls into a tool that the parties make use of to realize their own interests, the political environment is unfavorable for eliminating the risk of its sovereign debt default in the long term. The recurrence of the bi-partisan conflict over debt ceiling once again reveals the U.S. superstructure’s incapacity to solve national debt crisis. A debt crisis evolves into a political crisis, which in turn exacerbates the debt crisis. Such political environment over debt repayment renders the dim and pale prospect of the U.S. federal government’s solvency.
In short, you can’t inflate us away you decadent Western pigs! The FT reckons this even caused a market reaction.
