The proverbial Martian observer would agree with Moody’s Investors Service that the US government could lose its triple-A credit rating. This total outsider, like the rating agency, would see that current tax rates aren’t high enough for the government to keep its health-care commitments to the soon-to-decline baby boom generation.
Health-care costs, though, are the sort of problem that even halfway decent governments should be able to address. It may require more courage than US politicians are currently showing, but a combination of improved efficiency, higher taxes and lower government-funded benefits will do the trick.
The Martian, unlike Moody’s, would focus on a problem that is not under the government’s control: the possible withdrawal of the “exorbitant privilege”. That phrase—coined in 1965 by Valery Giscard d’Estaing, then the French finance minister—refers to the US ability to sell apparently unlimited amounts of dollar-denominated debt to foreigners.
This privilege has allowed the US to run up a net $2 trillion (Rs78.6 trillion) tab with creditor nations. The falling dollar keeps that total from growing by pushing up the value of US assets denominated in foreign currencies. Better yet, the US can shrink the real value of the foreign debt on its own—it just has to let inflation rip.
Even the most generous creditors eventually lose patience. That could happen if US inflation rises, especially if that occurs at the same time that a recession brings a big increase in the government deficit. Foreign creditors might then boycott dollar-denominated debt, forcing the US government to borrow in stronger currencies.
It doesn’t take extraterrestrial insight to imagine what would happen then. A weak dollar would bring higher interest payments, higher taxes to pay for them and discontented voters. Default would become a lively possibility. The US sovereign rating would head towards non-investment grade.
It would take only a modest downgrade to disrupt the global financial system, which relies on the dollar as the standard medium of exchange and the anchor of all sorts of valuations. But even mere earthlings know that both those who abuse privileges and those who let them be abused can often end up paying a steep price.