But what really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.
Obama could win and lose at the same time, striking a deal to avoid default but failing to pass muster on the substance of that deal with credit agencies, which could go ahead and downgrade the rating anyway.
Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs, but it’s not just that. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong? And it would give the president’s Republican rivals a ready-made line of attack that he’s dragging the country in the wrong direction. (emphasis added)
I see two upsides to this scenario. The first is very politically cynical and is contained in the last line of the above quote. If the US rating is downgraded before the general election next year this could and should be the millstone around the neck of the Obama administration. But that is a short term political gain which really does nothing to stabilize the US economy or the growing debt. Especially if our next president is another go along, get along guy like Bush Jr who had no problems passing big entitlement programs into law, or who dragged us into unfunded wars.
The better upside to this scenario is that America and Americans will have to tighten their belts and practice delayed gratification and self denial, two virtues which have largely died in American culture and politics over the last half century. We as a nation have to face a fundamental principal that is bitter medicine: as we citizens lose control of our own financial discipline, so the nation looses its control of financial discipline. Personal discipline is a leading indicator of a nation's discipline.
The doomsayers have been proclaiming the end of the world if the US debt rating is downgraded. One of the reasons is that interest rates for all types of loans will increase dramatically, such as mortgages, student loans, and car loans. No doubt this would hurt the economy in the short run. But it may just be the bitter medicine necessary to save this nation. The mortgage crisis of 2008 was reached, in large part, because of average, ordinary citizens who overextended in the size of their loans and debt loads. In their mortgage applications they often went to such extremes as to lie about their income and existing debt. Student loans will be one of the next crushing debt implosions as the costs of higher education quickly outstrip the rate of inflation. These loans cannot be forgiven through bankruptcy, and the fees and interest rates only blow up in the faces of the loan holders.
I can go on and on about the destruction of personal and household incomes wrought by carelessness through credit cards and car loans. But let's go back to the line I bolded in the above quote. We will very soon not be the number one economy in the world. It is a foregone conclusion that China will surpass us within the next decade or two. The one question that remains is, can we clean house and return the US to its place at the top within our children's lifetimes.
How has China moved into this position where they will overtop the US as the world's economic powerhouse? Many factors have led them to this, including very illegal actions by Chinese companies to steal intellectual property, unethical actions by the Chinese government to manipulate currency, and American's gluttony of cheap products made in China.
But there is another huge factor which is never discussed. Chinese, culturally, are treating their household economies the way the US did in the post depression era. They are enjoying the fruits of their labors and are consuming, but within restraint. They don't overextend on their debt the way that US households do.
Sometimes the best thing for an irresponsible, reckless child is to take away their toys/allowance. A downgrading of US debt may well be the best thing for our country and our culture.