Paying Attention to the U.S. Debt Crisis

Although its prestige as an economic superpower continues to diminish in the midst of the shadow of the rise of China, U.S. influence still greatly shakes the world.

Its position as the biggest economy has not only placed it as the main global economic pillar, but also often as the source of world economic fluctuations and instability. The latest example is the shaking of the stock exchange in all corners of the world, following Standard & Poor’s warning that it would lower the U.S. debt rating from “Stable AAA” to “Negative AAA.” This reduction in the debt rating is tied to the U.S. deficit and debt that is considered to already be at a dangerous limit, while its own economic performance is not considered to be convincing evidence that it is able to pay its debt.

The action of S&P and the world confusion is understandable, because all this time, there were never any signs of agreement or a program to ensure the trimming of that massive debt. In the last few years, the deficit and debt continued to increase, the highest among developed countries. It worsened with the financial crisis (the bailout and economic stimulus) as well as the cost of war. The continued growth of the deficit and debt reminds us that all this time, the big name of the United States was considered a guarantee of quality such that creditors or investors anywhere were willing to hold a letter of that country’s debt as a form of investment or a placement of idle funds although the bond yield is low compared to letters of debt from other countries.

With time, the United States became increasingly lax in having expenses larger than its income — so that without realizing it, the debt continued to increase until it reached $14.3 trillion. The current status and debt rating of the United States becomes a kind of serious gamble with the image and reputation of the United States.

Although at this time the possibility that the United States will fail to pay the debt is small — remember the ability to print money and the world perception that the United States is an investment heaven that is relatively free of risk — the dropping of the debt rating could be a sign that trust in the United States will also fall.

And, its implications could be very serious because it is not only in the United States that will have difficulty finding the obligations to pay its deficit, but also countries that hold U.S. debt letters who will also actively toss out these letters and assets held in U.S. dollars. The effect will be a blow not only to the U.S. dollar and the U.S. economy, but also to the U.S.’s biggest creditor countries. Will the world economy be able to bear the bankruptcy and debt default of the United States? The key now is whether or not there is a program that is credible and ambitious enough to trim this deficit and massive debt.

This depends on whether or not the U.S. government and people are ready to sacrifice by tightening their belts. The agreement by the Indonesian legislative assembly on the plan to trim the spending budget to $6.2 billion is a first step toward this promise.