US government debt, disaster waiting to happen

A view shows the Capitol Building in Washington, DC, on Jan 20. [Photo/Xinhua]

This is an editorial from China Daily.

Moody's lowered its assessment of the United States credit outlook from "stable" to "negative" on Friday, citing the country's large fiscal deficits and a decline in debt affordability.

Although it maintained the country's AAA rating, it warned in its statement that "in the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues", the US' fiscal deficits "will remain very large, significantly weakening debt affordability".

The prognosis came after months of congressional political brinkmanship between the Republicans and Democrats over the US debt ceiling.

Moody's is the only one of the three major credit rating agencies to still assign the US an AAA rating. Fitch downgraded its US credit rating from AAA to AA+ in August. Standard & Poor's downgraded it in 2011 during an earlier debt limit fight between the two parties.

On Saturday, spurred by Moody's move, Republicans who control the US House of Representatives released what the US media called "a stopgap spending measure" aimed at avoiding a federal government shutdown on Friday this week when the current federal temporary funding will expire.

However, the polarized political environment in Washington, featuring the infighting among House Republicans over the contentious choice of who should be the House speaker, as well as the intensifying partisan struggle between the two parties over the Joe Biden administration's budget and how it is spent, is not likely to be mitigated anytime soon.

As expected the Biden administration sought to pass the buck to the Republicans. "Moody's decision to change the US outlook is yet another consequence of Congressional Republican extremism and dysfunction," White House Press Secretary Karine Jean-Pierre said in a statement.

While the Republicans pointed to Democrats, with freshly installed House Speaker Mike Johnson calling the news "the latest example of the failure of President Biden and Democrats' reckless spending agenda" in a statement to news organizations.

That only served to reinforce Moody's justification for lowering its rating outlook: "Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability."

Nor does the dogfight between the two parties hide the fact that the US has largely adopted a limitless quantitative monetary policy to bail out the US economy since the outbreak of the COVID-19 pandemic. It is also through opening the dollar faucet and consistently raising interest rates to fight inflation that the US has reaped the rest of the world's recovery dividends by causing a large-scale capital withdrawal from other countries to the US.

Even if the two parties agree to raise the US' debt ceiling again around Friday after another seesaw battle, the "false fitness" of the US economy and the dysfunction of the US political system will continue to coexist as long as the country is still able to use the dollar to rein in the world economy.