The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

In Your Eye, Mr. President

11/11/2010

It has never happened before. The credit of the United States was downgraded yesterday. While this is considered inevitable if we continue to run such deficits, it was nonetheless a surprise yesterday.

But, the timing was interesting. It is not unusual for lots of acrimony before a G-20 Summit. This one is worse than usual. On the eve of the Summit, it was China who downgraded our credit. Coincidently, Moody’s upgraded the credit rating of China. This is an embarrassment to the U.S. President and improves the negotiating position of the Chinese at the G-20.

Fortunately, the final communiques signed by the G-20 leaders is always conciliatory. Hopefully, this one will be. It will probably focus on the need for infrastructure development in all countries, a source of minimal rancor. A few years ago, it focused on the need for rich countries to donate more aid to poor countries. (Then, the recession hit and no nation made its promised contribution.) Again, no rancor.

The final communique will also probably condemn competitive devaluation of currencies. Both China and the U.S. will sign it with dirty hands.

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