Standard & Poor's cut the long term sovereign debt rating on U.S. Government Bonds on Friday in an unprecedented, though not unexpected move.
Among the reasons cited for the ratings cut were “that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in (S&P's) view, would be necessary to stabilize the government’s medium-term debt dynamics,” and excessive political "brinksmanship" demonstrated during the Debt Ceiling debates.
It seems that S&P was a little displeased that lawmakers in Washington could allow the U.S. government to come so close to a catastrophic default in their quest to stop the opposing party from getting their way. Lawmakers from both parties hit back at Standard & Poor's accusing them of having a primitive and unsophisticated understanding of the U.S. economy and citing that the agency had displayed a poor track record during the housing crisis.
It is true that S&P had made horrid calls in the run up to and during the housing crisis. It displayed massive incompetence at assessing the risk inherent in mortgage backed securities, wherein it valued some securities, especially those with backing from organizations such as Fannie Mae and Freddie Mac. However, the problem then was the rating cuts were too late and too little given what events had occurred.
Some would argue that letting a AAA rated nation's debt levels reach $14.6 Trillion, after not once, but twice raising revenues from its own Central Bank (read quantitative easing), while simultaneously initiating further government spending plans with no plans on generating government revenues in the medium term, before cutting the nation's rating to AA+ is, on the part of the rating agencies, factors that prove that ratings cuts are still doing too little too late.
At least the banker to the U.S. seemed to think so. China, through its state owned news agency issued a statement criticizing the U.S. of making some very poor fiscal choices and managing the debt ceiling issue in a very poor manner. The statement went on to express severe concern about the safety of China's holdings of U.S. debt - amounting to over US $1 Trillion.
They went on to offer some suggestions to improve the issue and to avert a situation of this nature occurring again in the future. Their first suggested solution was for the U.S. to cut spending in areas such as defence and social services. If we look past the irony that China, a communist nation with the world's largest army, is lecturing another nation on overspending on social services and defence, we have to face the facts that with two pocket-bleeding wars going on and a population that tends towards the aged end of the spectrum, any cuts to spending in those areas would mean significant pain for the U.S. and the American people.
In order to avoid a "who are they to tell us what to do" attack by certain (probably Republican) politicians, the Chinese government statement went on to offer a second suggestion: to remove the prominence of the U.S. dollar in the global economy by creating a new global trade currency or basket of currencies. This move might seem to be difficult to accomplish without global support but China seems intent on establishing itself as the new big swinging dick on the block, and can simply decide to reduce its future purchases of U.S. treasuries.
The consequences of either reducing the liquidity of the market for U.S. treasury bonds or replacing the Dollar as the sole global trade currency would have catastrophic effects on the welfare of the U.S. and the American people by reducing the economic power and supremacy the nation previously enjoyed.
It seems that it would be less painful for the nation to just swallow the bitter pill and deal with the consequences of cutting spending and raising revenues, than being replaced as the economic superpower. Actually, even if revenues are raised and costs are cut, the U.S. might be on its way to losing its sole superpower status.
China certainly thinks so. And currently, that might be what matters most.