The only ways out are to cut spending or increase taxation (or some combination of the two). Neither is palatable.So what will happen next? Nobody knows! The BBC's Mark Mardell writes on the political aspects and Robert Peston covers the financial situation.
Here are some extracts that strike me as particularly interesting.
From Mark Mardell
- The decision by Standard & Poor's ... puts the USA below the UK, Germany, France, Singapore, Finland and 14 other countries.
- All America has been saying: Washington doesn't work.
- America's debt will continue to balloon and [S&P] have little hope of the politicians fixing it.
- They single out Republicans for ruling out tax rises.
- Americans are likely to bemoan the failure of politicians to bridge an apparently unbridgeable gap between two different world views. They may put their faith in Washington politicians, in an outburst of patriotism and goodwill, stumbling on a synthesis that suits all sides. But I wonder whether any of them will muse that the system itself may not be fit for purpose.
From Robert Peston
- Almost everything in the world - loans, goods, services - is priced in or priced off the dollar ... the dollar has a status in the financial system once occupied by gold.
- Whenever investors believe that the world is becoming a riskier place, their instinct is to buy US Treasury Bonds, to lend to the US government.
- When the price of US government debt rises and the yield on that debt falls, that typically means investors believe prospects for the global economy have deteriorated.
- Last week ... global share prices fell on the back of concerns that the eurozone isn't gripping the problem of investors declining confidence in the ability of Spain and Italy to repay their debts.
- The US losing its AAA rating ... is a very loud statement that there has been an appreciable increase in the risk ... that the US might one day struggle to pay back all it owes.
- The fiscal and economic challenges are conspicuous: a substantial and intractable gap between public spending and tax revenues in the US at a time of anaemic economic growth.
- Chinese news agency Xinhua said: "China, the largest creditor of the world's sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets."
- Probably the only thing to be said with any confidence is that the downgrade could hardly have come at a worse time, in that conditions in global markets are febrile.
In other words the world is at an economic crossroads and we have no idea where we will find ourselves in the future - but none of the options look very promising.
Meanwhile Europe and the USA are both struggling with debt issues while China, the major creditor, is anxious about losing its savings.
The future doesn't look good, does it. Things could easily get much worse.
