The Repercussions of America’s Lowered Outlook

For the first time since 1860, the international credit rating agency Standard & Poor’s lowered America’s credit outlook from stable to negative.

This is due to the size of America’s public debt, which as of April 18, 2010, reached $14.9 trillion – an average of $46,000 per American citizen, and 97 percent of the gross domestic product. America’s gross public debt rises to $55 trillion if we take the indebtedness of semi-governmental organizations into account. The fact that the budget deficit has reached $1.4 trillion – that is, 10 percent of the gross domestic product – was the second reason behind the agency’s decision.

This lowering in outlook represents a new tool for applying pressure on the American government, the American political system and the whole of its institutions. This complicates the picture between the administration and Congress, allowing them the chance, according to some interpretations, to manage their political differences, their priorities and their obligations.

This lowering similarly represents a new element of pressure on the American Federal Reserve’s monetary policy, which has followed an expansionist strategy over the past several years. As part of this policy, it has thrown trillions of dollars into the American and international markets in an effort to give support and relief to troubled organizations like banks, manufacturing companies and others, hoping to pull the American and world economy out of the wave of recession.

The change also represents a warning to the American Treasury Department about the need to formulate a policy within the next two years, in which the Obama administration believes it will be forced to cut spending and raise taxes. This model will cause controversy with Congress, which is controlled by Republicans who want to lower taxes on the wealthy and on large companies.

The Treasury Department will thus find it difficult to attract more investments to finance the budget deficit without raising the interest rate on the dollar and the bonds and treasury bills it dumps. These actions will inevitably slow the economic growth that the American administration wants to see in America and the world. This is all in addition to the greater pressures on the American citizens who borrowed to buy a house or car or to start a new enterprise. Thus, raising the interest on the dollar would complicate the expansionist policy of America’s central bank and would make them unable to reap the fruits of stimulating the American economy. This would mean that what has been spent during the past three years will risk failure, in a time when the economy is still suffering from high unemployment, possibly threatening Obama’s chances of remaining in the White House for a second term.

Standard & Poor’s decision will have consequences on global economies: it will add a new reason to raise the price of oil, prolong the recession and expose the economies of the world to more pressure from inflation. These represent new concerns for governments, at the same time that the governments of oil-producing countries will benefit and increase their desire to search for investments in global markets.

The decision to lower America’s outlook was not made without objections from American government officials, or accusations that the agency didn’t take into account the American president’s efforts to deal with the public debt and the growing budget deficit.

Locally, it will directly impact Jordan by raising gas prices, representing a challenge for the government and raising the cost of its loans. It will also pose a challenge to the central bank, which may raise the interest rate on the dinar. This will in turn raise the cost of borrowing, creating a challenge for domestic lenders, impacting the industrial sector in particular as it feels pressure from the lenders, then directly impacting its employees, competitiveness and profits. It will also pave the way for inflation to be raised above the target rate, which will speed the erosion of incomes and create more living pressures and demands on the government.