Fear of the Unthinkable

You have to look back as far as World War II to gauge what is threatening to happen: Standard & Poor’s rating agency has always rated America’s creditworthiness through wars and crises as AAA, the very highest possible.

That signifies that the USA enjoys the unlimited confidence of financial markets. Other nations, plus a few businesses, have been awarded the same rating, but the United States, because of its sheer size and economic importance, is considered the bulwark in the hysterical financial world — the U.S. Treasury bond is even considered by the financial world to be the prototype of security.

Now Standard & Poor’s has downgraded America’s credit outlook to “negative.” Is that bad? Not yet. Does it portend any danger? Yes.

The possibility that the United States will lose its AAA rating is now comparatively large. And since financial markets are less interested in what’s happening today than they are in what might be possible tomorrow, there have already been sharp reactions on Wall Street. Everybody knows that should the rating actually go down, the United States would have difficulty in financing the reduction of its enormous deficit. A great deal of capital would migrate overseas, and money to finance the U.S. government would become more expensive.

The threat of downgrade is the most significant proof of the debt chaos rampant in much of the world. It’s too easy to forget that the financial crisis has not been solved but still impacts the government level.

In that regard, it isn’t all about the current bitter fight over the budget and the debt ceiling in the United States, things that could realistically result in bankruptcy; the real issue is America’s inability to come to grips with the manifold problems on its own doorstep.

America has been unable to compete in global markets for some time; the financial branch struggles with the consequences of the past and is trying to find a future path. Wars on multiple fronts need to be paid for, states like California are sliding into bankruptcy, and President Obama is broadening the social safety net.

The only solution for the myriad problems facing the United States thus far has been to print more money. The U.S. government and the Federal Reserve have thus been working hand in hand in a bizarre way: Some of the bonds Washington puts out into the market are bought up by the Federal Reserve. It rakes in the interest the government has to pay for the loan; then it sends the money back to the government as a profit.

Standard & Poor’s has signaled that business as usual in that form can’t continue. If a lesser nation were doing business in that way, the investors would have long since bailed out. A country like Portugal, on the other hand, appears quite proper, but the naked figures don’t really tell the story: There are no borders beyond which everything automatically becomes risky. It’s more like a rubber band that stretches further and further until it finally snaps. No one can predict when that will happen.

Under former President Bill Clinton, America proved that it was capable of producing budget surpluses. People even speculated then as to the date that the United States would be completely debt-free. In hindsight, such talk was superfluous. But that era proved that things could be otherwise in the United States. For now, however, the only thing that can be said is — paraphrasing Frank Zappa — the United States isn’t dead; it just smells funny.