Don't Count America Out Yet

The situation with America’s national debt, and the world economy in general, resembles a poorly performed provincial play with bad actors.

Rating agencies took a firm and righteous stance, as though they were not the ones who gave investment grade ratings to junk securities three years ago, thereby contributing significantly to the global financial crisis. (Without any charges of conspiracy, I agree with the experts who say that Standard & Poor’s lowering of America’s credit rating was simply an asymmetrical response to the U.S. Securities and Exchange Commission’s tightened regulations of rating agencies, including its preparation for lawsuits over the pre-crisis distribution of credit ratings without a proper study of the relevant assets.)

The Republican Party also took a righteous stance. Republicans screamed at every opportunity about reducing government spending and that President Obama does not have a plan. They acted as if they had a plan (the stimulus package is exhausted and the infamous private sector is in no hurry to be the driving engine that will restore the American economy), and as though George W. Bush’s shortsighted policy was not to blame for the menacing character of the budget deficit and the national debt.

China strongly condemned the U.S. for its debt level, and encouraged others to seek a new, stable global reserve currency (as though it has its own currency, rather than just heavily regulated candy wrappers, which the Chinese government fears to release into free circulation). China is acting as though its “economic miracle” is not a derivative of the American economy, which is the largest market for Chinese goods.

Good-for-nothing analysts repeatedly predicted the economic collapse of the U.S., and the end of the dollar. Yet immediately after the announcement of the reduced U.S. credit rating, investors rushed to invest in the dollar and the very same U.S. Treasury bonds that are no longer rated AAA.

Frankly, watching and listening to this play is sickening. The American economy is actually facing unprecedented challenges and U.S. politics have come to a dead end. However, America’s debt problems are neither catastrophic nor insurmountable. Compared to the same situation in Italy and especially in Japan (where the national debt is more than twice as much as the country’s gross domestic product), the U.S. situation does not look hopeless.

All in all, it was clear that after the private sector debt crisis of three years ago, a financial crisis in the public sector was bound to follow. This was especially evident considering that the government bore most of the burden of stimulating the economy affected by the credit crunch. Issuance of new government liabilities covered much of the private obligations; a new layer covered the bursting bubble but, in essence, that layer was not much different from the initial one.

Yes, a public financial crisis in a developed Western country threatens to send new financial shocks worldwide. But no matter what they say about the U.S. national debt, the debt crisis is not the worst thing that could happen. I’ll venture to express a subversive thought: even if there’s a government default of a major developed country (the most likely candidates are Italy and Japan, though let’s say that even the U.S. has that potential), nothing super scary will happen: Judgment Day will not come and the Earth will not hit the celestial axis. Recall how quickly the recovery started after the Russian default. Well, yes, a new round of a crisis of confidence will reverberate through the world but, after a while, things will calm down. On the plus side, the default will certainly become a lesson to the world, which will stimulate carefulness and prevent the emergence of new credit bubbles in the future.

But there is something that’s much more troubling: Three years after the active phase of the global financial crisis, the private markets still have not started functioning in full force. Government incentive programs are supporting the economy, but their reserves have either already been fully exhausted, or are at their limit. What’s next? Is there a threat that the U.S. and the eurozone will now go down Japan’s path, which went through “two lost decades” after the bubble burst of the late 1980s?

Some people seriously pinned their hopes on the infamous BRIC countries, which they considered to be almost “grown up” and ready to displace the Western democracies (of which everyone has grown tired) in the international scene. But the years go by, and the BRIC countries remain second string to the largest economies in the world. The U.S., EU, Japan, Canada and Australia produce two-thirds of the world’s GDP. The developed Western countries are still the world’s largest markets, and BRIC countries’ “economic miracles” of the past decades are merely the by-products of Western growth in living standards and consumption levels. All of the growth in the emerging markets has been built on the growth of exports to the developed markets. Take, for instance, China. In the past three years, it was able to maintain high growth rates only at the expense of actually forcing trillion-dollar loans on its businesses and citizens (which most likely led to the formation of its own bubbles, whose bursting we will eventually hear). But that’s all. This did not give rise to a magical “domestic demand” that pushed the Chinese economy forward. There are no further prospects: Either the Western economies will start to grow again, or we’ll see the end of the Chinese economic miracle.

In reality, Japan’s “lost decades” experience demonstrates something else: Perhaps the economists are wrong when they consider happiness to be the continuous increase in consumption and GDP. Given Japan’s high standard of living, its well-developed society and well-functioning public institutions, the West is already actively starting to say that perhaps constant growth is not as necessary as economists claim — the absolute living standard level that has already been achieved is much more important.

Until the markets bounce back, the following idea may be a consolation for the Western population: In case of a likely stagnation, there might be a plus side. There will be time to look inside yourself, to learn how to better use existing resources and to reduce unreasonably overblown consumption. However, this is bad news for the BRIC countries and other emerging markets, because if the West is not growing, then they won’t either. These countries have not yet developed large-scale domestic markets based on high standards of living and consumption.

But it’s too early to start talking about America’s lost era. During its history, the nation has made it through various crises. Entrepreneurial spirit, creativity, high productivity — during difficult periods these qualities have put the U.S. on the right track many times. It’s hard to believe that this country will suffer the same fate as Japan. Don’t count America out yet.