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Editorial: Greenback blues
Published: Jul 28, 2011 22:16 Updated: Jul 28, 2011 22:16
US economy can survive the current crisis because it remains the only game in town
Saudi Arabia has every reason to be concerned as US lawmakers continue to bicker over their countrys financial future. With the Aug. 2 deadline looming for an agreement to increase the US debt ceiling of $14.3 trillion, the international markets are becoming increasingly nervous about the fate of the dollar, the worlds only reserve currency and in times past a haven for anxious investors.
Saudi Arabia is paid in dollars for its oil. Our currency is tied to the dollar. The Kingdom has approximately 2 trillion invested abroad, the greater part of it in the United States. The value of those investments, the value of our oil earnings and the value of our currency are all under threat as politicians in Washington grandstand for their constituents and argue bitterly from two utterly polarized positions.
The radical right of the Republican Party wants less government and lower taxes. The Obama administrations Democrats want higher taxes in exchange for cutbacks in government spending. The division of powers within the US political system has always demanded compromise, albeit sometimes messy compromise. To the frustration of senior Republican leaders, the voluble Tea Party lawmakers, many elected last November on the back of the groupings radical economic policies, are refusing compromise. It seems not to matter to them that their didactic purism is not only endangering the financial status of the United States, but imperiling a global economy which already has troubles enough.
In the offing is the loss of the Washingtons treasured top AAA investment grade rating. The major ratings agencies have already warned that without a debt ceiling fix, this is going to happen. Indeed on small US agency has already cut its rating, along with a Chinese monitoring body. If no deal has been reached in the next five days, the downgrade will become general.
The way in which international investors are already seeking to protect themselves, by hedging their dollar assets or going for outright disposals, underlines the extent of the crisis that is building.
Without agreement in Congress, the government will run out of cash. It will not only be unable to pay its domestic bills for the likes of salaries and pensions, but it will also have nothing with which to repay what it owes investors in its debt. The consequences for the rest of the world economy if the US defaults have been described by US Treasury Secretary Tim Geithner as catastrophic.
Yet there is perhaps a very thin silver lining in this ominous economic cloud. This is that investors in the US currency do not have many other places to run with their money. The euro zone is under serious threat. The Japanese economy is stagnant with minimal yields. Booming Brazils economy has overheated and the government has therefore just imposed tough protection on its currency. Meanwhile, China, the economic powerhouse, is suffering significant inflation and does not wish the renminbi to yet advance to the status of a fully convertible reserve currency. Battered and downgraded the US economy may become, but it could survive the humiliation, because it remains the only game in town.
© 2010 Arab News
Editorial: Greenback blues
Published: Jul 28, 2011 22:16 Updated: Jul 28, 2011 22:16
US economy can survive the current crisis because it remains the only game in town
Saudi Arabia has every reason to be concerned as US lawmakers continue to bicker over their countrys financial future. With the Aug. 2 deadline looming for an agreement to increase the US debt ceiling of $14.3 trillion, the international markets are becoming increasingly nervous about the fate of the dollar, the worlds only reserve currency and in times past a haven for anxious investors.
Saudi Arabia is paid in dollars for its oil. Our currency is tied to the dollar. The Kingdom has approximately 2 trillion invested abroad, the greater part of it in the United States. The value of those investments, the value of our oil earnings and the value of our currency are all under threat as politicians in Washington grandstand for their constituents and argue bitterly from two utterly polarized positions.
The radical right of the Republican Party wants less government and lower taxes. The Obama administrations Democrats want higher taxes in exchange for cutbacks in government spending. The division of powers within the US political system has always demanded compromise, albeit sometimes messy compromise. To the frustration of senior Republican leaders, the voluble Tea Party lawmakers, many elected last November on the back of the groupings radical economic policies, are refusing compromise. It seems not to matter to them that their didactic purism is not only endangering the financial status of the United States, but imperiling a global economy which already has troubles enough.
In the offing is the loss of the Washingtons treasured top AAA investment grade rating. The major ratings agencies have already warned that without a debt ceiling fix, this is going to happen. Indeed on small US agency has already cut its rating, along with a Chinese monitoring body. If no deal has been reached in the next five days, the downgrade will become general.
The way in which international investors are already seeking to protect themselves, by hedging their dollar assets or going for outright disposals, underlines the extent of the crisis that is building.
Without agreement in Congress, the government will run out of cash. It will not only be unable to pay its domestic bills for the likes of salaries and pensions, but it will also have nothing with which to repay what it owes investors in its debt. The consequences for the rest of the world economy if the US defaults have been described by US Treasury Secretary Tim Geithner as catastrophic.
Yet there is perhaps a very thin silver lining in this ominous economic cloud. This is that investors in the US currency do not have many other places to run with their money. The euro zone is under serious threat. The Japanese economy is stagnant with minimal yields. Booming Brazils economy has overheated and the government has therefore just imposed tough protection on its currency. Meanwhile, China, the economic powerhouse, is suffering significant inflation and does not wish the renminbi to yet advance to the status of a fully convertible reserve currency. Battered and downgraded the US economy may become, but it could survive the humiliation, because it remains the only game in town.
© 2010 Arab News
