US governments 'abused their position' as world economic power
The US credit downgrade is the result of successive US governments "blatantly abusing" the country's privileged position, says Harbour Asset Management chief executive Andrew Bascand.
The downgrade by Standard and Poor's on the weekend, from AAA to AA+ followed a deal on the country's debt ceiling which was widely panned as being a political compromise which did little to address the long term problem of the country's high fiscal deficit and national debt.
Mr Bascand, whose firm invests globally, said it was a case of frivolous US politicians not taking their country's situation, or its economic responsibilities, seriously.
"US politicians used the review of the debt ceiling for political grandstanding, illustrating a lack of seriousness about the need for a clear plan and united front to sort things out and establish a sustainable path for US debt reduction," he said. As the world's reserve currency, the US is in a unique and privileged position, he said.
"We think that the S&P rating decision reflects an opinion that they now view the US to be blatantly abusing that privileged position.... The S&P decision can be seen as a direct response to a shambolic US political system in need of a wakeup."
In the medium to long term a debt downgrade should result in higher US bond yields and lower US currency," Mr Bascand said.
But for the US dollar the downgrade is "ambiguous", he said.
"There's no obvious candidate to replace the US as the reserve currency - they are all either too close to the problems in the euro, too small, or not developed enough."
In the medium term, though, if US growth remains low - as now looks more likely - then the US Federal Reserve will have to run a looser monetary policy and that would lead to further dollar weakness.
One other implication for New Zealand is that government bonds - here and in Australia - will look good - which will, in turn put upward pressure on the New Zealand dollar.