Global Economics: time to learn mandarin!

It was difficult to know how to react to the downgrade in US debt from its traditional AAA rating. My first reaction was to scoff at the idea that one of the ratings agencies could have the sheer nerve to do it, this is after all the same people who gave AAA ratings to stacks of sub-prime Mezzanine Credit Default Obligations.

As Paul Krugman put it in yesterday’s New York Times, “America’s large budget deficit is, after all, primarily the result of the economic slump that followed the 2008 financial crisis. And S&P…. played a major role in causing that crisis, by giving AAA ratings to mortgage-backed assets that have since turned into toxic waste.” Thank you Paul.

However, in fairness to S&P, who issued the downgrade, there is a very important point at the heart of their statement namely, "the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges". In other words, America is currently ungovernable at precisely the time when strong leadership is needed, witness the negotiations over raising the debt ceiling.

What was striking about much of my weekend reading was the extent to which the American public still view their debt problems in isolation, which can be easily solved by cutting taxes to stimulate growth, raising taxes to increase receipts to the Treasury or cutting Government spending. In all the discussions I read on the New York Times or Washington Post websites there was barely a mention of the sovereign debt problems in Europe or the potential implications of a US default or continued subdued economic performance.

Which leads me to ask two searching questions to which I do not have answers. Firstly, how can the dollar continue as the international reserve currency (the foreign currency which is held by central banks and other major financial institutions as a means to pay off international debt obligations) when it is clearly so politically and, as a result economically, dysfunctional?

Secondly, is this the moment when America begins to wake up and realise that it is unlikely to be top dog much longer and what effect will that have on the American psyche?

Certainly the rhetoric over the last few weeks has been extraordinary with Putin accusing the US of living "like a parasite" on the global economy and of being a threat to the worldwide financial markets. Rarely, if ever, has America been scolded in such terms.

However the real threat to America comes from China which is due to overtake the US as the world’s largest GDP sometime in 2016. As a client of mine put it last week, “the Chinese idea of an economic slowdown is GDP growth of 7-8 per cent, which is our idea of a boom.”

I don’t know where the rapidly unfolding events of the last few weeks will take us. Only one thing is certain, it’s too late for me, but I’m seriously considering getting my two children to learn mandarin!