Global Economic Intersection article of the week.
Introduction
I never had much use for financial ratings. I view them as second best reference points for lazy financial sector workers and people who are unable to research investment possibilities on their own. And as we learned in the recent banking collapse, the raters have no idea what is going on. So what do we draw from the S&P rating change for the US? Well, at least the ratings change does focus attention on the US financial condition.
US fundamentals have not suddenly changed. The country is still in a recession. Sound fiscal policy calls for another stimulus package that would increase its government debt. How does the US compare with other countries on ratings and real economic conditions? Read on.
Country Comparisons - Financial Indicators
Three key indicators of financial problems for any country are its government deficit, government debt, and a current account deficit. Government deficits increase government debt, and debt can get become unsustainable, e.g., Greece. However, if countries run large current account surpluses, e.g., Japan, they can continue with large deficits and debt. Foreign investors know that if either becomes too onerous, the government can pay them off with foreign exchange reserves. However, current account deficits must be financed by capital inflows, and the need for continuing large capital inflows can become problematic. Greece is again the prime case: foreigners are not interested in either loaning or investing in Greece, and hence its capital inflows do not offset its current account balances, and hence - crisis.