US trying to put out a fire with gasoline

'Who will be the next?" was the common refrain as other members of the US' triple A club, such as Fannie Mae, Freddie Mac and the top five insurance conglomerates, were unavoidably downgraded following the first downgrading of the US Triple A rating since 1917.

However, some argue that the downgrading was no big deal and the ensuing market chaos was only a "knee-jerk response", as the hegemony of the US dollar means the US can reduce its debt burden by depreciation, a further round of quantitative easing (QE3), and by stoking fears to make US assets more attractive. Yields on 10-year US government debt had actually fallen recently, and investors are unlikely to rush out of US debt, the dollar, or even US equities en masse.

But even the hegemony of the dollar cannot guarantee the US will escape the escalation and deterioration of its debt problem.

The outlook for the world economy remains uncertain. The recovery of the developed countries is losing momentum, while the risk of inflation in developing ones is growing. QE3 or a precipitous dollar decline will cause runaway inflation globally and escalate the "hot money" risk in emerging markets, which could lead to a trade or currency war.

Policies, such as QE3, which are at the cost of other countries, have been opposed worldwide. The US has promised it will "strengthen international cooperation", and "adopt responsible policies to safeguard the world recovery". So a new round of quantitative easing, would disregard world opinion and its own promises.

It would also not only weaken the US dollar as the main global reserve currency, which is a strong symbol of the US' economic strength and global standing, but also result in political and diplomatic problems for the US.

Depreciation and QE3 may be able to slightly raise US exports and consumption, but they will not address unemployment, the absence of new pillar industries and other structural problems that plague the US economy. On the contrary, such policies would accelerate the rise in the core inflation rate and cause more trouble for the Obama administration.

They are like trying to put out a fire with gasoline.

Globalization means every country is interconnected. The idea that the world economy will only be good if the US economy is good is out of date. Today US policymakers should bear in mind that the US economy will be healthy only if the world economy is healthy.

It is time for the US to take decisive - if painful - action to ensure that it lives within its means, shoulders its responsibilities to protect creditors and acts to boost confidence in the US' governance and economy.

The author is a Beijing-based scholar of international relations.

(China Daily 08/19/2011 page8)