published Thursday, August 11th, 2011

Shooting the messenger

Throughout history, there has been an inclination to dislike a person who brings bad news. In extreme cases, that may have led literally to shooting the messenger. But when the message needs to be heard, it is wrong to attack those who deliver it.

So it is disturbing to learn that Senate Democrats may be considering an investigation of the credit rating agency Standard & Poor's, after S&P recently lowered the United States' credit rating from the top level, AAA, to AA+. The downgrade angered President Barack Obama and many Democrats in Congress.

In delivering the bad news, Standard & Poor's cited the failure of Congress and the president to deal aggressively with our catastrophic debt. S&P had urged lawmakers to reduce deficits by at least $4 trillion over 10 years, but Congress managed only a little over half that level of deficit reduction in the recent deal to increase the debt limit.

It is understandable that the downgrade of the United States' credit rating is frustrating and embarrassing to Obama and Democrats in Congress. The downgrade occurred on this president's watch, after all, and Democrats controlled both houses of Congress for most of the past four and a half years. They obviously do not want to be held accountable for the breakneck spending that contributed to the first-ever U.S. credit downgrade by a major rating agency.

But even if not all the fault for the downgrade and our nation's economic troubles rests with Democrats -- and it doesn't -- they are wrong to attack the credit rating agency, which is simply responding to Washington's fiscal recklessness.

And the fact is, it is not only S&P that is worried about America's debt problem. The two other main rating agencies -- Moody's Investors Service and Fitch Ratings -- said they, too, might lower the United States' credit rating unless there is serious effort to reduce debt. And a smaller but highly regarded agency -- Egan-Jones Ratings Co. -- had already downgraded U.S. bonds from AAA to AA even before S&P took action.

Surely the Obama administration and Senate Democrats do not believe there is a conspiracy among all these agencies to lower or at least consider lowering our country's credit rating without justification.

And yet the Senate Banking Committee is "gathering information" about S&P's lowering of the credit rating, The Associated Press reported. That might be innocent enough, but with the committee's chairman, Sen. Tim Johnson, D-S.D., almost simultaneously calling S&P "irresponsible" for reducing the rating, it looks like an attempt to intimidate S&P or any other agency that might reduce America's credit rating.

Meanwhile, the president has spoken dismissively of S&P, and Treasury Secretary Timothy Geithner said of the agency, "[T]hey've handled themselves very poorly ... ."

We disagree. The problem doesn't lie with the rating agencies. It lies with elected officials in Washington who still are not focused on the overriding need to slash our federal debt.

They should be zeroing in on that issue -- not shooting the messenger.

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librul said...

PART ONE

The downgrading of the credit rating of the United States last Friday means that August 5, 2011 will be recognised as one of the key turning points in the historic crisis of US and world capitalism along with September 15, 2008, the day Lehman Brothers collapsed, and August 15, 1971, the day President Nixon withdrew the gold backing from the US dollar.

These three dates are linked by a causal chain of events which records the historic decline of US capitalism, and with it, the entire global capitalist order.

The short-term motive for the Standard and Poor’s downgrade was clearly spelled out in the rating agency’s announcement: dissatisfaction with the extent of the cuts to Medicare and other entitlement programs announced in the agreement between the Obama administration and Congress.

The downgrade has been followed by a bloodbath on international share markets as rumours sweep through financial circles of credit downgrades to other countries—France was one of those mentioned—and the collapse of major banks.

The decision by the US Federal Reserve Board on Tuesday to extend its ultra-low interest rate policy for at least another two years—itself an admission that its policies have failed and there is no prospect for “recovery” in the American economy—boosted the markets for one day before another 500-point fall on Wall Street yesterday.

While the share market falls were triggered, at least in part, by the S&P downgrade, the decision itself was the outcome of far-reaching historical processes that are reflected in the growing financial turbulence. Underlying the market chaos is the protracted and irreversible decline in the economic power of the United States, which played the key role in stabilising world capitalism after World War II. Hence the waning of the US is not simply an American phenomenon. It is a concentrated expression of the crisis of global capitalist order.

August 11, 2011 at 12:16 a.m.
librul said...

PART TWO

The initial marker of the US decline appeared exactly 40 years ago next Monday when President Nixon went on television on a Sunday evening to announce to the world that henceforth America would no longer honour its commitments under the Bretton Woods Agreement of 1944 to redeem US dollars circulating in the rest of the world for gold at the rate of $35 per ounce. The decision shattered the system of fixed currency exchanges that had played such a decisive role in reviving post-war trade and global investment after the devastation the 1930s.

The immediate cause of the decision was the emergence of a US balance of trade deficit. But this was the outcome of a more fundamental problem in the Bretton Woods system that had been noted a decade earlier by the Belgian economist Robert Triffin. Triffin had pointed out that in conditions where the US dollar effectively functioned as world money, the maintenance of international liquidity dictated the need for an outflow of dollars from the US. But that very outflow and the building up of dollar holdings outside the US, far in excess of its gold stocks, effectively undermined the foundation of the Bretton Woods system—the American commitment to redeem dollars for gold.

The removal of the gold backing did not end the dollar’s role as the global reserve currency. But it did mean that the international monetary system had lost its anchor and would become increasingly volatile. That instability was reflected in a series of financial storms: the plunge of the US dollar in 1979, leading to the imposition of record interest rate hikes by Federal Reserve chairman Paul Volcker; the Latin American debt crisis of the early 1980s; and the global stock market crash of October 1987 sparked, at least in part, by differences between US and German authorities over interest rate policies.

August 11, 2011 at 12:17 a.m.
librul said...

PART THREE

In response to the 1987 crash, the newly-appointed head of the US Federal Reserve Board, Alan Greenspan, instituted the policy that would be deployed henceforth—any financial crisis would be met by opening the credit spigots of the central bank to supply cheap money to the major banks and financial institutions.

While this policy helped fuel the growth of the US economy over the next 20 years, it did so by promoting ever-more parasitic forms of wealth accumulation. US capitalism had risen to global pre-eminence on the basis of industrial production and the great advances it facilitated in the productivity of labour. Now industry was being destroyed and outsourced as financialisation replaced production as the chief source of profits—a process that assumed grotesque forms in the housing and sub-prime bubble.

Even as the US economy underwent expansion in the 1990s and 2000s, this very growth masked a deepening contradiction: the global reserve currency, the dollar, was the currency of the world’s most indebted nation. This had never happened before in the history of global capitalism.

In the decades before the outbreak of World War I in 1914, the global economy rested on the British pound. Sterling was effectively as good as gold because Britain was the chief supplier of capital to the rest of the world. While it had been eclipsed as the “workshop of the world”, it was still the world’s chief financier, both because of the global role of its banks and finance houses, as well as the vast financial resources it was able to draw from its colonies, above all India.

August 11, 2011 at 12:19 a.m.
librul said...

PART FOUR

World War I struck a major blow to Britain’s financial position from which it never recovered. In the absence of a currency that could function as world money, the international finance system disintegrated in the inter-war period and the world economy fractured into rival trade and currency blocs. Only with the rise to global dominance of the US after World War II was a new international financial system established. This system is now in an advanced state of disintegration as a result of the decay and rot in its central pillar, the US economy.

The significance of the credit downgrade has been dismissed by some commentators because, in the words of Greenspan, there is “zero probability” of default because the US can “always print money” to pay its debts. Such an ignorant outlook passes over the fact that even before the question of a US default arises (and given the default of August 15, 1971 such an event may take place sooner than many may think) the decision further undermines the global financial system.

World capitalism is now operating without a stable monetary system. Under capitalism, money has to perform two major functions: it is a medium of exchange and a store of value. Both of these functions are being completely disrupted by the plunging value of the US dollar, with far-reaching consequences.

The impact on the medium of exchange function is reflected in the escalation of prices for globally-traded basic commodities such as food and fuel, leading to inflation across the world—above all in the so-called less developed countries, provoking an eruption of the class struggle as can be seen so clearly in the Middle East.

August 11, 2011 at 12:20 a.m.
librul said...

PART FIVE

Likewise, the store of value function is being undermined as the dollar falls against all major currencies as a result of the Fed’s cheap money policies. Little wonder that Chinese authorities, responsible for more than $1.2 trillion invested in US debt, have issued demands that US monetary authorities bring the currency under control. Every day that the value of Chinese financial assets invested in US markets melts away, brings closer the time when these losses impact on the stability of the already fragile Chinese banking and financial system.

Chinese authorities have again called for the establishment of a new global reserve currency, not tied directly to the US or any single national currency. But as the fate of the euro, now being torn apart by national rivalries and conflicts among the eurozone powers, demonstrates, there is no prospect for such a development. No currency, grouping of currencies or synthetic currency can replace the dollar as world money.

There is no set of economic policies or regulatory mechanisms that can resolve the present crisis. Historical experience points to the return—in an even more explosive form—of the conditions of the 1930s.

At that time, the world fractured into rival economic blocs, leading to world war—the most destructive in history. Today, as that prospect looms once again, the working class must intervene. The chaos of the capitalist system and the dangers it poses to the future of mankind—mass poverty, depression and war—must be ended through the taking of political power by the working class and the overturn of the profit system through the establishment of international socialism. The fulfillment of this perspective requires the building of the International Committee of the Fourth International as the world party of socialist revolution.

Nick Beams World Socialist Web Site http://wsws.org

August 11, 2011 at 12:22 a.m.
nucanuck said...

librul, I hope many will take the time to read carefully your post. The conclusion will be a bit difficult for most, but the rest is a good recitation of how we have become a failed state.

August 11, 2011 at 12:51 a.m.
dabbscr said...

yes, lets waste more tax payer money on an investigation. exactly what does not need to happen.

August 11, 2011 at 4:56 a.m.
librul said...

I will gladly contribute to investigations - as long as they result in trials, convictions and executions.

August 11, 2011 at 6:46 a.m.
Livn4life said...

OK Mr. Enlightening everyone Librul, we now know it is ALL RICHARD NIXON'S fault. He changed from gold to the dollar standard and no one else kept spending and spending, not listening to any sane voices which even in the 80s concluded we could not go on as we have and as we currently are. But okay, okay, it's Nixon then Reagan and the Bushes. No one else is responsible for the way in which politicians of both parties have nearly bankrupted this country by being unaccountable, hiding terrible spending within bills for needy children or elderly then blaming the rich for their own indulgences. By the way, many members of Congress, both parties are the rich they seem to rail against. They merely pass laws they are exempted from. So go on blame the dead, blame Conservatism and all Republicans. What a joke!

August 11, 2011 at 9:26 a.m.
nucanuck said...

L4l,

The "who done it" part really doesn't matter much. The reality that we dropped the discipline of the gold standard, modified the graduated taxation formula that kept some sanity into wealth distribution, and then spent without funding our largesse has combined with other demographic and resourse pressures that have brought "the American way of life" to a painful halt.

The spending and consumption model was never sustainable, but we took it as far as we could. The percentages of world consumption have been so tilted toward the US that there was little room for sharing with the rest of the world. That's over and we are now faced with discovering a new model for America.

Trying to re-create what we had will only bring pain and disappointment, but we are going to try. The inevitable failure will take several more years reach the bottom point from whence we will begin to build a new America.

August 11, 2011 at 10:44 a.m.
nucanuck said...

L4F,

I guess I'm not smart enough to understand why a gold or multi-metalic based currency system would be incompatable with graduated taxation. The US had a gold backed currency until 1971 and we still have a graduated tax system today, but one that has been modified greatly since America's best days. I don't count from 1980 to the present as our best days because those were the years that we heavily borrowed from the future and that put us in the box we are now in.

Would you be kind enough to explain what you meant in your last post?

August 11, 2011 at 7:25 p.m.
brokentoe said...

Well, Liv4l, Reagan did raise the debt ceiling a whopping 19 times totalling 199%, the highest of any president. In fact, each time a Republican has been president the debt ceiling has been raised more often than any Democrat with the exception of maybe one. I think that was Jimmy Carter.

August 11, 2011 at 8:55 p.m.
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