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You Are What You Owe

Author: Sebastian Mallaby, Paul A. Volcker Senior Fellow for International Economics
April 28, 2011
Time Magazine


Americans are forever grumbling about government gridlock. But the whole game changes when a credit-rating agency begins to echo them. On April 18, Standard & Poor's, one of those mysteriously powerful firms that grade the financial strength of bond issuers, announced that it was starting to wonder whether the mighty U.S. government could be counted on to repay its creditors. It was a big moment: the first time in seven decades of monitoring Uncle Sam that S&P had sounded such a warning. "The sign of political gridlock was a key determinant in our outlook change," explained an S&P executive. "Twilight in Washington," read a Financial Times caption.

While there were certainly analysts who regarded the timing of the downgrade as somewhat political (S&P itself has recently been under pressure from the government for its part in the financial crisis), few questioned its fundamental merit. The Congressional Budget Office projects that within 12 years, federal debt could reach 100% of GDP, putting the U.S. deeper in the hole than bankrupt Ireland or Portugal; the bond raters from S&P have good reason to be worried. America's largest creditor, China, which has been wagging its finger about the state of U.S. finances for the past three years, took the opportunity recently to urge the U.S. to adopt more "responsible measures" to protect investors. This came on the back of a hand slap from the International Monetary Fund (IMF) just a few weeks prior. The IMF had rebuked the U.S. for its lack of a "credible strategy" to stabilize its debt — an indignity once reserved for poor countries.

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