The world's leading economy has had its credit rating reduced as the ability of the US political system to manage the crisis is called into question. James Meadway looks at the implications.
The US debt downgrade, carefully timed after close of the US markets on Friday evening, is the clearest sign yet of the shifting economic order. S&P, one of the largest credit ratings agencies in the world, has shifted the US' rating down one point, from prized AAA to AA+, suggesting an increase in the risk of US default. This follows weeks of deadlock in Washington over the US debt limit and repayment strategies during which time the inability of the US political system to manage the crisis became clear. Washington may now find that its ability to raise funds at low rates of interest is permanently weakened, in turning hitting private borrowers inside the US, while institutional investors – frantically averse to any risk – will be looking to shift their funds elsewhere.
Although frantic efforts are being made over this weekend to reduce the damage, there is a strong chance that – after a dismal week – markets will reopen on Monday in a state of high alarm. The downgrade shock could feed back into Europe. But whatever the day-by-day jitters – and they could be substantial - the real import of the downgrade is symbolic. It reflects the changing balance of international forces. Stock market panics are themselves indicative of that.
The credit ratings agencies have emerged as arbiters of the international economy – establishing the boundaries of the terms for the euro bailouts, and now expressing a lack of confidence in the US' capacity to repay its debts. There will, no doubt, now be increased calls for tighter supervision and regulation of their activities, but to a large extent shooting the messenger: for their international ratings, the credit agencies very largely follow – not lead – market opinion. They are private companies and, while moves by the biggest agencies are watched intensely, they do not have the capacity to force markets into accepting something traders and financial institutions do not want to believe.
The most obvious example of this was in the rating agencies' role during the sub-prime crisis, where they happily stamped toxic assets containing high-risk subprime debt as prized AAA – for which services they were paid handsomely by banks and others, right up until the debacle of 2007-8.
So the downgrade does not change the situation. It simply clarifies it. A truth has been made undeniable: the US is in decline, and new powers are rising. The extraordinary official Chinese response expressed the same sentiment. “The US government has to come terms with the painful fact that the days when it could just borrow its way out of messes of its own making are long gone.” China, as the US' largest creditor has “every right” to demand that the US “address its structural debt problems”.
China has intervened in the US crisis before, of course – pushing, for instance, for the nationalisation of mortgage dealers Fannie Mae and Freddie Mac in 2008. But this is the first time it has expressed its concerns so forcefully, and so openly.
Capitalism, old and new
The crisis in the US is a reflection of a wider malaise inside the historic centres of capitalism. North America and Europe are both now deeply entangled in twin crises of economic weakness, and political incapacity. The US, still the world's only military superpower, has been living on borrowed time for decades, reliant on its capacity to generate cheap credit from the rest of the world. Europe's divided ruling classes established the euro as means to promote economic – and therefore political – integration. In both cases, the mobilisation of finance on an extraordinary scale appeared to offer a solution to endemic economic weakness, with cheap credit fuelling a boom over the last decade. In both cases, that 'solution' has been revealed as totally illusory – indeed, as the crisis has unfolded, has simply worsened the collapse when it came. The rise of New Capitalism, outside the historic centres of power and accumulation with China in the lead, has further provoked the crisis.
Europe is still the weakest link in the international economy. It is here that the entanglement of economic malaise and political impotence is most pronounced, in the form of the crisis of sovereign debt. There is no obvious ability inside the existing structures of the EU and the European state system to resolve it – not without major shifts in the balance of power across the continent, at least, away from the EU and back towards the national states.
And the risk of contagion, spreading from the weakened historic centres into the new zones of accumulation – most -particularly in Asia – is substantial. New Capitalism was relatively insulated from the financial crisis, with China, Brazil and other major economies recovering rapidly from the 2007-8 crash. But as the world economy moves into a second phase of crisis, their own imbalances may become revealed. Overcapacity could be worse than feared, with export markets collapsing and domestic demand unable to compensate.
The favoured 'solution' to this, particularly inside Old Capitalism, is austerity – of forcing the costs of the crisis away from those who caused it, in the banks and the financial institutions, and onto the rest of society through sharp public spending cuts. It is morally bankrupt, and it is economicallly suicidal: we have known, since at least the 1930s, that cutting government spending in a weakened economy merely worsens the situation, as demand drains out. Yet this is the only solution we are presently being offered.
The European Conference Against Austerity, organised by the Coalition of Resistance, is of paramount importance. An international crisis demands an international response. Taking place in London on 1 October, and supported by trade unions and campaigning organisations continent-wide, the conference will be an opportunity to discuss and to co-ordinate activity right across Europe. It will be the first, vital steps, in building an international movement against austerity and the rule of finance.
Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).