US and EU political resolve cracks in the face of fiscal ruin

Telegraph
"Credit rating agencies should never be taken too seriously, but for Standard & Poor's to put the United States on "negative outlook" is none the less something of event. ...If nothing else, S&P's bombshell highlights the hopeless mess the world's largest economy has managed to get itself into.

Coming on top of renewed escalation in the eurozone crisis, it feeds into a sea of worry about the sustainability of the economic recovery and the increasingly parlous fiscal position of many advanced economies.

Experience in Japan over several decades shows that it is perfectly possible to have apparent fiscal catastrophe as well as repeated credit agency downgrades, and still be able to borrow from the markets at absurdly low interest rates. As if to confirm the point, Monday's "negative outlook" was only mildly negative for US Treasuries.

Yet unlike Japan, which raises virtually all its debt from domestic investors, has mountainous foreign exchange reserves, and maintains of relatively low levels of private debt, the US is highly reliant on overseas capital to fund its spending, is as badly indebted privately as it is publicly, and runs a still massive current account deficit.

America cannot for ever rely on Chinese reserve accumulation to finance the deficit on affordable terms. The dollar's status as international reserve currency of choice is also quite plainly on the wane. "