Downgraded

Fitch Ratings this week downgraded US debt by a notch. Washington reacted with a howl while stock markets retreated.

The minor downgrade from AAA to AA+ is significant. The US heretofore enjoyed the highest credit rating possible, indicating that lending to the American government is virtually risk-free. That reliability provided the central pillar to the global financial system. Every other government’s reliability was measured against the certainty that the US government will pay its debts in full and on time.

Washington branded the downgrade as arbitrary and unwarranted. The US jobs market was strong, inflation is showing signs of slowing and the economy looks poised to avert a recession.

Fitch, however, insists that its downgrade is based on much longer term trends. The ratings agency observes “a steady deterioration in standards of governance.”

This likely includes Washington’s ability to manage its debt over the long horizon. The US carries the largest public debt, amounting to 113 percent of GDP. The Philippines’ comparable number is 60 percent – nearly half of America’s debt-to-GDP ratio.

Fitch’s concerns covers the period from the January 2021 insurrection inspired by Donald Trump’s claims about a fraudulent election, the increasing polarization between the two main political parties and the recent stonewalling by the US House of Representatives on raising the debt ceiling that brought the country to the brink of default. The Republican majority in the House basically held debt repayment hostage while they bargained for other concessions from the Biden administration. This event was not reassuring for investors.

Polarization between the two parties makes it increasingly unlikely they will cooperate in the politically challenging task of trimming the outstanding debt and imposing some semblance of discipline in public spending. US debt could run unbridled.

The recent downgrade is meant as a wake-up call for all Americans. The country could not go on indefinitely spending its way out of every problem.

The erosion in the quality of governance is magnified by the dominance of the right-wing in the Republican Party and the rising influence of the left-wing in the Democratic Party. This makes bipartisan cooperation more difficult in the future.

The right-wing Republicans favor more preferential treatment for the large corporations, exemplified by the tax breaks granted Corporate America during the Trump years. This widened the budget deficit and worsened inequality.

The left-wing Democrats, for their part, favor spending on affirmative action programs and wider subsidies. The remarkable economic achievements of the Biden administration are based on unsustainable deficit spending.

Electoral politics in the US has evolved such that neither party could reliably dominate government. The country is basically evenly divided between the Red States and the Blue States. Neither party, therefore, would be willing to risk losing their constituencies by exercising greater fiscal prudence.

With the two parties locked in virtual stalemate, American electoral politics ceases to be anchored on a longer view of the nation. The Red State/Blue State deadlock makes the parties more inward-looking. This is the reason why the next presidential contest will likely be between the aging Biden and the scandalous Trump. Both parties are left pandering to their respective bases.

Although intended as a warning sign, the credit downgrade is unlikely to alter the unhealthy trajectory of US electoral politics.

Core inflation

If we go solely by the headline numbers, the inflation figures for July might seem impressive. The headline inflation rate decelerated from 5.4 percent in June to 4.7 percent in July.

The headline inflation rate reflects items of expenditure that are more volatile. The core inflation rate remains about 2 percentage points above the headline number. It was 7.4 percent in June and 6.7 percent in July.

The average inflation rate from January to July is still at an elevated 6.8 percent. Inflation might be cooling, but it is still too hot for the majority of Filipinos who are poor. Nearly 80 percent of the household expenditure of the bottom 30 percent of families is on basic necessities such as food, electricity, water and transportation.

A quick annotation by the Foundation for Economic Freedom and disseminated by former finance secretary Gary Teves underlines aspects that should make us continue worrying about the inflationary scourge.

The headline inflation rate for the NCR is 5.1 percent while the number is 6.8 percent outside the capital region. This means that inflation is higher in the rural areas. For the bottom 30 percent of families, the inflation rate is 5.2 percent, higher than the national average. For the year to July, average inflation for the poor stands at 7.6 percent.

Sugar inflation rate is at 22 percent, down from the previous month’s 30 percent. Vegetable inflation is at an astonishing 22 percent, while milk is still at 10 percent. The inflation rate for flour and bread stands at 11.7 percent.

For the poorest 30 percent of Filipino families, therefore, inflation continues to bite. Recall that despite the administration’s impressive approval ratings, it received negative marks for handling inflation. Furthermore, as concurrent agriculture secretary, the President bears direct responsibility for the continued high food inflation.

The monetary tightening policies imposed by the BSP slows investments and economic growth – the price to pay for battling the scourge of inflation. But food inflation is cost-driven. This includes the higher cost of imported rice that we expect after India, the source of about 40 percent of all rice exports, clamped down on rice exportation. Russian attacks on Ukraine’s grain facilities will reflect in higher flour prices globally.