DAVID SANGER ESSAY


WASHINGTON - For decades - through political upheaval and wars and wild bouts of deficits or inflation - the debt of the United States has always been rated AAA, the gold standard of creditworthiness by which all nations are compared.

That was true before President Obama published his budget recently, with its projections of huge American deficits over the next decade and beyond. Astoundingly or not, it was as true after those estimates were published. Of course, had it been the United States Widget Company projecting red ink as far as the eye could see, no one would lend it a dime.

The closest thing Washington got to a warning came from Moody’s, an investor service that rates the sovereign debt of nations: Without action to cut the deficit or a faster-thanexpected recovery, the projections for the decade “will at some point put pressure on the triple-A government bond rating.”


Red ink as far as the
eye can see does not
hurt auctions at the
Treasury.


Nobody blinked - not Congress, not the White House, not the investors around the world who keep buying Treasury bonds to finance this year’s $1.6 trillion shortfall, at low interest rates.

What explains this oddity? Why is the world betting that the United States will overcome its political deadlock and solve its problems - believing, it seems, in the truth of Churchill’s biting quip that America will always do the right thing, after exhausting every other alternative? And how long can this aura of invincibility last?

Maybe a long, long time. One of the many things that makes the United States different is that it prints the world’s most important currency and can always print more - one reason investors in government debt remain confident they will be repaid, even if in dollars devalued by inflation or by changing exchange rates.

There is also value in being the one nation on which the world still depends for security. That helps explain why foreign investors, including China, can denounce American politicians, Wall Street bankers and sleepwalking regulators for creating the current mess - and still buy at the next Treasury auction.

This paradox of American financial exceptionalism was unusually clear recently. When the stock market shuddered on February 4 because of worries about national defaults, it wasn’t Washington’s mountain of debt that got everyone rattled. It was the plight of a handful of profligate spenders in Europe - notably Greece, Spain and Portugal - whose comparative foothills of debt suddenly made them dubious credit risks.

Each of those countries knows the meaning of “imperial overstretch.” But it’s been a few centuries since Madrid and Lisbon were centers of vast empires, and a lot longer for the Greeks. What brought them down this time was not global ambition but local gridlock, in which politicians could not, or would not, cut spending at a time of high unemployment and social need. Making things worse, they now are on the euro - meaning they can no longer print their own way out of the problem, either. And it is unclear whether their partners in the euro bloc can afford either to bail them out or to let them default.

“They have no easy option,” said Professor Simon Johnson of M.I.T.’s Sloan School of Management. “They can cut spending or raise taxes.”

Their problems may be minor compared to those of Japan, a battered economic superpower that prints its own currency and whose newspapers, two decades ago, regularly published charts projecting when Japan might overtake America as the world’s biggest economy. The papers still run such charts, but now the question is when China will overtake Japan for the No. 2 spot (likely later this year).

Today, like Toyota, Japan’s government is having a braking problem - it can’t figure out how to slow spending on a rapidly aging population, and like everyone else has reacted to recession by hitting the spending accelerator.

But unlike America, Japan is no longer considered so indispensible. For a quarter of a century it had a AAA rating, then lost it. Now Standard and Poor’s warns it may further downgrade Japan because it has failed “to stem fiscal and deflationary pressures.”

Japanese finance officials cringe when someone points out that their current rating puts them alongside Slovenia and Chile; a further slide strikes them as catastrophic. Still, by next year things could be worse: Japan’s public debt is expected to hit $9.4 trillion, or 181 percent of its gross domestic product. By that measure, Washington still looks good, if only by comparison.

n 1990, sinking so low was unthinkable in Japan, which poses a question: What about America in 2030? Can the unthinkable occur here, too?

Jeffrey Garten, the former dean of the Yale School of Management, doesn’t dismiss such possibilities. “Something’s changed,” he said. “The financial crisis created such a sense of uncertainty about everyone’s assumptions that our relative decline is now acknowledged. The possibility that the United States may not be the world’s unquestionably best credit risk is now discussed. And that’s significant, because so much of this is psychological.”

It doesn’t help, either, that confidence in the rating agencies is also not what it used to be. They missed the dangers of the subprime mortgage crisis. They failed to foresee the 1997 Asian crisis. And they are, in important ways, captives of the past: The United States gets its AAA rating because of its track record and because it has had a stable, comparatively transparent system of governance. Like Churchill said, it has always faced up to its problems in the end. And so, built into the rating, there is an expectation that it always will.

John Chambers, who oversees sovereign debt ratings at Standard and Poor’s, said: “We believe the Obama administration’s own projections will not be realized.”

This is a little like the cold war: Because the nuclear option was unthinkable, it never was used. That seems a part of the psychology behind President Obama’s budget release. By revealing just how bad the numbers can be, Mr. Obama and his aides seem to be betting that the worst can be avoided.

The strategy could redefine “the full faith and credit of the United States.” These days, it seems to mean: the more faith you have in Washington, the more credit it gets.

“Uncle Sam,” in front of the New York Stock exchange, asks people if they can “spare a trillion.” / CHIP EAST/REUTERS