The odds that the U.S. will default on its debt on or after August 2 increase each day. In the event of default, credit rating agencies like Standard & Poor's and Moody's will have to downgrade America's credit rating from AAA. It looks like the reputation of the US as an ironclad place to invest is now toast. Just watch what that does to the US dollar, the reserve currency that drives global commerce.
Negotiations on a debt-ceiling deal broke down again over the weekend and leaders of both parties are planning to unveil their own debt ceiling plans bur Mohamed El-Erian, co-CEO of PIMCO-the world's largest bond fund manager-is warning that even if they reach a debit limit deal, the United States' AAA rating is still at risk. As he writes in the Huffington Post, America's economic problems with endemic high unemployment and a housing crisis that goes from bad to worse have not been fixed. "The resolution will likely be temporary, and the damage will be real and long-lasting-both of which render an already worrisome situation even more difficult going forward. Indeed, by illustrating so vividly to the whole world what is ailing America, the weekend's political theatrics should make us all worry even more about the world's largest economy."
"First, consider the context. America's already-fragile economic psyche and its global standing have taken a material hit. Forget about "animal spirits" for now. Instead, worry even more about an economy that is already having tremendous difficulty sustaining an acceptable growth momentum, and that already suffers from an unemployment crisis that is increasingly protracted in nature. Analysts will now scramble to again revise down their projections for growth, and up those for unemployment. Second, remember the content. The debt and deficit issues that are at the root of the debt ceiling drama are, unfortunately, a small part of a much larger set of structural impediments to employment, investment and wealth creation. The housing sector is still languishing, credit intermediation is uneven, infrastructure investment is lagging, job skill mismatches are increasing, and income and wealth inequalities are worsening."
Jonathan Capehart sums it up nicely in the Washington Post: "The United States finds itself between two unprecedented and untenable positions. On one side is default. On the other side is a downgrade of the nation's creditworthiness."
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