China, the largest foreign holder of U.S. debt, took the world’s economic superpower to task for allowing its fiscal house to get into such disarray. It also revived its calls for a new stable global reserve currency to replace the U.S. dollar, gaining a sympathetic ear in the United Kingdom.
“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” China’s official Xinhua news agency said in a commentary.
Xinhua scorned the United States for a “debt addiction” and “short sighted” political wrangling. China, it said, “has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets. [Full Reuters story here]
This is audacious. No one asked China to accumulate dollar assets. It is a subsidy involuntarily extended by China’s households to China’s exporters. Chinese households should be making this demand on their government; not the China government on the US. In many ways, China is a glasshouse (as are many other countries) and this story is just one reminder of why it is so.
Chinese credit rating agency downgraded the US from A+ to A and warned that the days of the US dollar are over. Well, not so soon.
De-coupling is another nonsense that is being peddled. Asia cannot and will not decouple either from a macro perspective or from a market perspective. The Asian invincibility myth will explode by the time this crisis is well and truly over, along with many other myths.
A human interest story on Mr. Trichet here. He is going to have to debase the Euro to preserve it. Personally, I cannot understand the Euro levitating above 1.40 vs. US dollar.
New York Times has a story with the header, “Global Finance Leaders pledge bold action to calm markets”. It is all their actions over the last three decades that have brought things to such a pass. If they stop acting, there is hope for investors even if there is pain in the short-term.
It is not a surprise that there were and are differences within the ECB governing council on ECB purchasing Italian and Spanish sovereigns. That is what makes it difficult to predict the end-game in the Eurozone and the survival of the Euro itself, in spite of the ECB President ‘getting it’.
“France is not, in my view, a AAA country,” said Paul Donovan, London-based deputy head of global economics at UBS AG. “France can’t print its own money, a critical distinction from the U.S. It is not treated as AAA by the markets.” [Full Bloomberg story here]
I agree with this observation. France is not AAA and it is a matter of time before French vulnerabilities grip the market.
That is why even if the selling frenzy/panic in the market exhausts itself for now – as it normally would – it is not the end but will be the end of the beginning.
Mohamed El-Erian hopes that the debt downgrade would be a wake-up call. But, I think Raghuram Rajan has the answer to him. While Raghu thinks that American politicians did a good job under the circumstances, his assessment that American politics merely reflects the polarisation that has taken place in the American society does not leave the reader with much hope for bipartisan consensus to emerge in the near future.
This brilliant column written in June by Peter Orszag lends support to Raghuram Rajan.
This post originally appeared at The Gold Standard and is reproduced here with permission.