Agencies such as Moody’s Investor Services, Fitch Ratings, and Standard & Poor’s, all unelected and with access only to the same market information as anyone else – no more – have repeatedly threatened that unless the US cuts spending by at least $4 trillion they would cut the rating to “double A” making borrowing more expensive.
The 11th-hour deal agreed by the House of Representatives and the US Senate increases the $14.3 trillion debt ceiling by $2.1 trillion, but only in return for immediate cuts of $1 trillion with a further $1.5 trillion to be agreed by 23 December – just ahead of the 2012 presidential election race.
Crucially, there is no provision for extra revenues – such as from taxes – for a Treasury badly depleted by not just the cost of two wars but tax cuts for America’s richest. President Barack Obama renewed the George W Bush tax cuts last December without any quid pro quo from Republicans on the debt ceiling.
Nobel Prize-winning economist Paul Krugman expressed bitter disappointment with the agreement which he called capitulation to blackmail by the so-called Tea Party wing of right-wing Republicans whose members are hostile to tax and government.
Professor Krugman argued that the US economy is deeply depressed and as a result of a deal based almost entirely on spending cuts meant the US “will almost certainly continue to have a depressed economy all through next year. And we will probably have a depressed economy through 2013 as well, if not beyond”.
The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further… [it’s] like medieval doctors who treated the sick by bleeding them, and thereby made them even sicker.”
Professor Mohammed El-Erian, the Oxford and Cambridge-educated economist drafted from managing Harvard University’s assets to run PIMCO, the world’s biggest bond management company, said the debt deal was only a temporary reprieve from a wider underlying malaise: unsustainable long-term debt and the lack of US economic growth.
He warned: “Because of the very public and intense squabbles in Washington DC, already-anaemic economic growth will be weaker, the unemployment crisis will worsen, income and wealth inequality will deteriorate further and, ironically, the fiscal dynamics will be more challenging.”
