The Dollar's Wake-Up Call

One structure tentatively shook its finger at another structure, and the world shuddered. The S&P agency uneasily reported that it is changing the outlook on the independent rating of the U.S. from “stable” to “negative,” and the economically well-versed portion of humanity felt their jaws drop from shock: well, well, well, someone finally called a spade a spade; even if the phrasing was extremely polite, even obsequious.

Why is this such a bombshell? After all, the United States’ rating, according to Standard and Poor’s release, is still one of the highest possible — AAA.

The agency decided to downgrade only its forecast for the future, tentatively explaining in the very careful, almost subservient announcement that if the superpower does not figure out in the next couple of years what is to be done with the budget deficit and foreign debt, then the rating will perhaps have to be lowered after all.

It would seem that two more years of carefree life are ahead, but exchange indexes around the world jumped, gold went higher, oil zigzagged and the White House announced that the S&P “is not taking into account the lessons of history,” meaning it is underestimating the concealed power hiding in America.* Just like the Japanese in 1941. By the way, that is the same year the U.S. received the AAA rating, which it has held ever since.

Some are already wrathfully condemning the preparation for the attempt on this holy ground for the injurious spirit — The Daily Mail wrote, “S&P came out with a dangerous and foolish appeal, which may unravel the stability of the American and world economy.”* Others ridicule it for the faint-heartedness — Forbes magazine says, “The AAA rating should be reduced right now … S&P will try to have its cake and eat it too … the S&P simply does not have the integrity to honestly rate U.S. debt … It has too cozy a relationship with the U.S. government and Wall Street to threaten the status quo.”

So is there a reason to make noise? I would say that there is all the reason to make noise and to make it much louder. After all, possibly the most important economic event of this second decade of the 21st century has been hinted at aloud for the first time. After all, the independent rating assigned by the rating agency is a recommendation on whether it is worth it to give loans to this country or whether it is better to search for money using some other safer practice. A rating of AAA means that knowledgeable people at the rating agency vouch before mankind upon their honor and all of their reputations that this nation is very reliable and will pay their debts to the last cent with a 100 percent probability, if not greater. As this relates to America, it is an obvious lie.

But it is a lie solidified by long use and is critically important for the country, which is already in debt up to its eyeballs, but continues to live beyond its means, plugging huge budget gaps with money that is borrowed or simply freshly printed. Here, after all, it is important that no one says anything out loud about these obvious things. While its reputation and rating is superior, the whole world willingly gives the American Treasury and other local structures money on loan, and at low interest rates at that. If that reputation together with the rating disappears, then the money will be lent unwillingly and at high interest rates.

And the bubble will burst. America’s global financial hegemony will come to an end, and in general much in the American and world economy will fall away, as Daily Mail correctly predicted. But the reason is not in S&P’s findings but in objective reality. This consists of the fact that the U.S. got bogged down up to its ears in its problems and is not exerting particular efforts in order to find a way out. The entire outside world at close range does not see their deplorable condition simply because they are afraid to think about it.

According to general opinion, Portugal is destroying Europe with its financial problems and has already almost destroyed it. Portugal is a current example of how not to live. Let’s compare it with America.

The Portuguese government’s debt is approaching 90 percent of GDP, and America’s in the coming weeks will exceed 100 percent of the GDP. The rates of yearly growth of the American government debt are higher than in Portugal. The main source of the increase of government debt in both nations is the budget deficit and the excess of expenditures over income. The deficit in Portugal’s budget last year was 8.6 percent of the GDP; America’s was 10.5 percent. This year Portugal promises to decrease the deficit down to 5 percent of the GDP. (This is unlikely, but it will be decreased by some amount). The U.S. budget deficit in this fiscal year will be approximately the same as before: somewhere around 10 percent of the GDP.

In essence, Portugal somehow looks more sound, at least in its attempts to tangibly cut expenses. If the world were arranged fairly, then the American rating would be just as low as Portugal’s. But the world is what it is, as you know. Therefore, Portugal is given credit all the more unwillingly and expensively, and the United States receives it easily and inexpensively.

But this will not last forever. It is only until the moment when it suddenly dawns on everyone at once: the dependability of the dollar is an illusion. Now the loyal rating agency is indicating that this moment is not far off.

If it is beginning already, then events will avalanche, and it will not be smooth or gradual. The global economy lives from panic to panic right now. The dollar accounts for 70 percent of the global monetary reserves. The relationships in the global economic triangle, the U.S., China and the European Union, are mired in the American debt and dollar settlements. And global trading of energy sources and global speculation about them are dramatically affecting even our country. So what will happen? If we start from the formulae that humanity has come up with up to this point, then there are three possibilities.

The first is for America to refuse to pay the debts, in lay terms a default; we brush this one aside as not realistic. It is not the American way. The U.S. has always paid its debts. Instead, possibility number two is completely plausible. Dollar inflation, even to 10 percent like we have, is completely able to stop the growth of the American government’s debt in realistic calculations, and if needed, can even decrease it. Everyone that gave the U.S. money on credit will get it back fairly in depreciated bills. This turn of events has already been considered by the Forbes analyst previously mentioned, blasting the meek S&P agency: “The agency completely fails to consider how reckless printing will impact the value of the dollar itself. It can assure investors that they will be repaid, but the agency doesn’t spare a thought about what if anything our creditors may be able to buy with their dollars.”

From me, I would add that the possibility of the collapse of the dollar would signify the plurality and the expedited loss of the United States’ role as the leader of the world economy. Who will take that spot? We can say just one thing for sure: it will not be us, with all due respect for the authorities’ fantasies about transforming Moscow into aworld financial center. Maybe China. Maybe no one. The possible scenarios are not fully foreseen, but changes on such a scale do not happen painlessly.

However, there is still possibility number three. It is what the American administration promises, talking about the secret reserves of America and, in particular the secret resources of unification hidden in the depths of its political class. And in reality, Republicans and Democrats are now loudly debating how to decrease the budget deficit and bring the debt to sensible amounts. Plans are swapped, but not one of them resolves the problem fundamentally, and they do not line up with their opponents’ plans.

On the level of ideas, an escape from this situation is obvious. In order for the debts not to grow, Americans should begin to live within their means, which means a reduction in the standard of living by perhaps 10 percent, plus some general economic decreases. Theoretically, it is entirely possible. For the last 20 years we have not had such zigzags, time and again. But in the U.S. not one serious politician has resolved to say this aloud.

However, attempts to at least partially cut government spending are nevertheless highly probable. And each decrease in the money that the American government pumps out is also a decrease in the influx of speculative money on the oil market, meaning a fall in oil prices. Maybe even sharply, depending on the seriousness of the forthcoming American efforts to make ends meet, which involves a switch not only in their budgetary politics but a genuine upheaval of ours. After all, our powers have almost no other revenue apart from oil and gas.

This should have been said from the very beginning.

All of the Putin oil dollar prosperity, and the resulting habit of our authorities to live outside our means, is just an incidental product of Americans living beyond their means for the last 10 years — a life they have built for themselves. Their good luck is coming to an end, and ours is next. So the quiet call given to the dollar by the S&P agency has also sounded for us.

*Editor’s note: These quotes, while translated accurately, could not be verified.