Lately, some of my friends have been posting triumphant messages across social media. The focus of their attentions is the ongoing global financial collapse – and their messages are steeped in a misguided Schadenfreude.
You can celebrate America’s credit-rating downgrade – but know that no matter who you are, no matter where you live – the adverse consequences belong to you too. And like so much else in our present-day economic racket, if you are poor, the consequences of this collapse belong to you more than anyone else.
I think that all reasonable economists (empiricists, not ideologues) agree that Larry Summers and Stanley Fischer’s neoliberal brand of “development” has failed. Today, The Lexus and the Olive Tree stands more for Thomas Friedman’s fatuous grandiosity than it does for the greedy, slavering model of global economic development he sought to describe and promote. Globalization exists – but more as a nexus for communicating the credit-default virus than anything else. We’re beginning to learn, to our profound alarm, that quarantine is technically beyond our grasp.
The United States is at the center of self-propelled zeppelin puttering over a black, jagged, and barren abyss. The United States is at the center of the global economy and credit – the ability to borrow and lend money – is what fuels it.
Like gasoline or coal, credit costs money. Countries, companies, state and local governments, school districts, universities, and football teams all borrow money. And so do most of you.
The cost of the money you borrow is the interest rate assigned to the loan. The interest rate you pay is proportional to the repayment risk you pose to the lender: Are you solvent? Do you have a job? Can you pay me back when you say you will? Will you refuse to pay me?
America is solvent. America has a job. America can pay for the money it borrows. But – this is where politics counts – America may refuse to pay. That’s what the Standard and Poor’s credit-rating downgrade means; American politicians are so dysfunctional that they may choose to allow the country to default on its debt obligations. As the Guardian recently pointed out, this is the singular achievement of the Tea Party – and basically, a broken political system.
In effect, the downgrade is a signal to China and America’s other creditors (likely, your pension fund among them) that they should demand more for the money they lend to the US. "It is your fiduciary responsibility to account for the risk that American politicians may refuse to pay you back; hike the interest rate you demand."
America funds its wars by borrowing money. Isn’t it better if the country pays more to war against other people? Might that not make the Americans think twice about borrowing a trillion greasy dollars for a global fireworks campaign? Or about securing the cost of Israel’s access to the global financial markets (debt guarantees)?
Well. Yes. But the problem here is that so much else is linked to America’s borrowing costs. The US has been the world’s most stable and productive (economically) political/institutional unit for so long that many other entities (countries, companies, banks) have adopted the interest rates carried by American bonds (America’s borrowing costs) as a benchmark for what the objective cost of money actually is. The fact today is – for better or worse – that there is no lending mechanism or convention that isn’t pegged to US Treasury yields through a first, second, or third-order relationship.
But why does this matter to you? You don’t borrow money ever. You own your home and car and you don’t live beyond your means.
Rising credit costs impact you in the same way (more or less) that rising oil prices do. The price of everything will go up because the true dollar-cost of producing everything will go up (remember, manufacturers have to pay more to borrow money). That’s saying nothing about the impact of the credit downgrade on currency fluctuations (aside from increased volatility, I have no idea what will happen to the currency exchange markets in the short, medium or long term. This situation is unprecedented).
I avoided big criticisms here to avoid ideological debates about the merits of capitalism versus other economic models (although credit is a feature of all of them – including Islamic). I get shy about using labels when it comes to economics; I think empirical description and piecemeal prescription towards an end (social justice) is far better than trying to conform the world to the various isms that are bandied about.
What is clear, however, is that the current global economic system is failing. I don’t think it’s about operational mechanisms; I believe that the system has been gamed (yes, by fat cats). But, that’s another essay.
My point is just that unless you’re in the habit of spiting in your face, the ongoing collapse of the global economy is nothing to celebrate. One economic lesson worth learning is that we inhabit a mostly incomprehensible and hopelessly complex global system of inter-reliance and co-dependency. We don’t have to like what America does to know that when it falters, normal people everywhere (particularly in the Global South) will struggle harder to survive. That’s something that no liberal should be cheering about.