No New Hope for the Debt Star (Episode IV) as S&P downgrades Sovereign Debt
No New Hope for the Debt Star (Episode IV) as S&P downgrades US Sovereign Debt, while BRICS seek “Phase Out” of Dollar
This has been a tough month for the US financial empire and its satellites, which is looking more and more like the ‘Debt Star’ of the movie. Challenges are not only coming from the ‘Rebellion’ of emerging BRICS nations who want a bigger share of the pie but also from within the system, which is turning on itself.
The Force just got weaker for US bonds
Indeed ratings agency Standard & Poor’s sent a shock through the markets on 18 April after cutting its long term outlook for the US bonds to “negative” from “stable”, saying it doubts Washington’s ability to tackle its huge debt and fiscal deficits.
Although not as spectacular as some of the bankruptcies of the past years, this is a significant event. It means that whilst S&P is still rating the US bonds to the maximum AAA note, the long-term outlook is “negative” for the first time since the Japanese attack on Pearl Harbour in 1941. A negative outlook means there is a one-third chance of a downgrade in the next 2 years.
Seventy years ago, WWII turned out to be the beginning of America’s hegemony over the Free(-Market) world. Will this symbolic downgrade mark the end of a cycle as the US face an increased risk on their sovereign debt,… just like the vilified PIGGS?
It is all the more remarkable that this challenge is coming from an institution within the ‘financial markets value chain’ whose business interests have always been closely aligned to the US national interest. For a financial intermediary like S&P, to break away from this line and turn against its surrogate state might mean that we are entering an new phase of globalisation. A phase where the target is not Greece or some other peripheral nations anymore, but the very heart of the US system from which globalisation started.
… for the first time since then.
The BRICS Rebellion is sensing the change in the Force
In a pattern common to empire breakdowns, when things ‘go south’ on the inside, it usually starts to also go wrong on the ‘foreign affairs’ front. This is exactly what is happening with the emerging BRICS countries determined to forge the roots for an alternative to the US dollars as a world reserve currency.
Although a very diverse group, Brazil, Russia, India, China and South Africa all share concerns about the unfairness of the current system, which gives the US the ability to devaluate at no cost… for them.
This is was what ‘quantitative easing‘ has been all about. By printing US dollars, the US Government has sustained national growth but also automatically decreased its debt. This is too much for those owning US bonds (debt) like China. Big providers of primary energies like Russia and South Africa have also been suffering, because long-term contracts are signed in US dollars. Even exporters like India and Brazil have seen their competitiveness fall on the American market, be it or IT services or soy oil.
That is a lot of unhappy counterparts in the global economy… Basically all those countries saw the value of their assets locked in US dollars shrink as the US printer was hard at work. Moreover, beyond the pure economic reason, what also unites most of these countries is their new-found liberty to stand against the US hegemony.
The new BRICS on the Block
The G20 Clone Troopers are ignored
Meanwhile in Washington, the G20 met in a fairly unnoticed manner mid April to “agree on imbalance indicators”. This newly former extension of the old restricted G8 has been an attempt to bring emerging countries “in the tent”. The trouble is that the promised reformist vision quickly turned out to be a clone of the old agenda, driven by a “white-man club”, serving the old ruler and its closest allies embroiled in the same financial turmoil.
Many emerging countries do not share the long-term interest of keeping the Western financial system alive. Not only they do not particularly benefit from it, but they also experience economic growth rates unseen in developed countries for a while. The world could be their. They know it. They now feel free and powerful enough to build a new order with their own BRICS.
Europeans are neither psychologically ready nor economically strong enough to contest the US leadership on economic affairs. So the young members are taking matters in their own hands and make the G20 look more like a retirement club for old rulers, instead of the world economic government as we were once told.