These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:
S&P has downgraded Japan’s long-term debt from AA to AA-, indicating the U.S.’s AAA rating should be taken down several notches to less than AA-.
National economies must generate foreign currency for their governments to pay foreign creditors, and national governments must be able to tax, sell bonds or print money, without causing inflation, to cover operating expenses and pay interest.
Japan’s ability to pay is simply much stronger than the U.S.
Japan has a strong current account surplus, thanks to a powerful manufacturing export machine, and the Bank of Japan sits on $1 trillion in foreign-currency reserves. It has more than enough cash flow and adequate reserves to service the claims of foreign creditors. The U.S. can hardly make such a claim.
Domestically, Japan suffers from deflation, slow growth and maintains a large budget deficit to prop up domestic demand because Japanese citizens save so much. With prices falling, even in the face of global commodity inflation, the Japanese government has adequate latitude to sell bonds to its savers, and the Bank of Japan has more than enough flexibility to purchase those bonds as needed without instigating domestic inflation or creating other adverse macroeconomic consequences.
The U.S. is a different situation. The U.S. has a gaping current account deficit–on oil and with China–and policies pursued by the Bush and Obama administrations are worsening those conditions. Owing to the large current account deficit, the U.S. must run a huge budget deficit, close to 10% of gross domestic product, just to sustain growth at 3.5% and keep unemployment from flying out of control.
The large U.S. current account deficit indicates the U.S. economy as a whole isn’t generating adequate revenue to pay foreign creditors interest due on U.S. debt, and Washington must service the interest on externally held debt by printing more bonds and selling those abroad, but foreign private demand for those bonds is satiated. Consequently, the U.S. is much too dependent on the government of China to print yuan to buy dollars and, in turn, to use those dollars to buy Treasurys to finance the U.S. private economy’s current account deficit and the federal budget deficit.
Beijing plays along because the resulting weak yuan and trade surplus with the U.S. helps deal with Chinese unemployment, but printing so many yuan requires Beijing to sterilize those extra yuan by persuading Chinese investors to purchase too many yuan-denominated government bonds, bonds the private sector doesn’t want. Continue reading…