Anarchy in the UK - London Riots Sparked by Police Beating, Poverty, Ethnic differences...

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British riots: Malaysian student injured in London

By RAHIMY RAHIM and QISHIN TARIQ newsdesk@thestar.com.my

PETALING JAYA: A 20-year-old Malaysian student who was on his way to buy food to break his fast was attacked by rioters in Barking East, London.

Wounded and bleeding on the street, he was later robbed by another gang.

The robbery on Mohd Asyraf Raziq Rosli which took place at 7pm London time (3am Malaysian time) yesterday was recorded by someone and later uploaded on YouTube.

Height of danger: A woman jumping from a burning building in Surrey Street in London in this image taken from Twitter. Riots spread to new areas of London in the city’s worst unrest in decades. — Reuters
 

Through the YouTube posting, the attack on Mohd Asyraf was highlighted in the BBC World News and newspapers like The Sun and The Telegraph.

The 75-second video showed the first-year Kaplan University student, who was bleeding in the mouth, being robbed by a group of men who had initially pretended to help him.

The Sun described the incident as “riot yob mug injured child” while Internet users have branded the group of men seen in the video as scums.

The Telegraph described the clip as being filmed from “somewhere above and looks down onto an unknown street apparently in London where gangs are roaming the streets”.

Mobbed and robbed: Video grab pictures showing an injured Mohd Asyraf (right) being robbed by a mob who had earlier pretended to help him. He is being treated at Royal London Hospital for a broken jaw.
 

London Umno Club president Dzuhair Hanafiah, who identified the victim, said Mohd Asyraf was walking with his friends to buy food when they were confronted by a group of gangsters.

“His friends managed to escape but he was attacked.

“He is now being treated at Royal London Hospital for a broken jaw and disjointed teeth,” he said when contacted yesterday.

The victim lost his mobile phone and wallet during the incident.

Dzuhair said efforts were being taken by the Malaysian Student Department and London Umno Club to evacuate students from the affected area.

Unfriendly message: A council worker removing a destroyed vehicle, spray painted with the words ‘Welcome to Hackney’ in Hackney, North London, yesterday. — Reuters
 

“It was a very dangerous area even before the rioting started,” he noted.

Mohd Asyraf's mother Maznah Abu Mansor, 47, said she was informed by Mara officers about her son's attack.

“I was initially very worried but I'm glad that he is all right. However, I am not able to talk to him because of his injuries,” she said.

She added that she would appeal to Mara for financial support to visit her son who is to be operated on today.

“I also hope Mara can bring home the remaining students,” said Maznah.

Malaysian High Commissioner to Britain Datuk Zakaria Sulong said an officer has been dispatched to help the victim.

“We will know what we can do to help the victim after meeting him,” he said.

Avoid hot spots in Britain, urges Anifah

KOTA KINABALU: Foreign Minister Datuk Seri Anifah Aman said his ministry is very concerned over the development in London as the rioting spreads to other parts of the city.

“We are worried as rioting has spread to places like Queensway and Oxford Street where there are a large number of Malaysians, including our High Commission staff,” he said.

He added that the riots were also spreading to places outside London like Bristol, Nottingham and Leeds.

“We have advised Malaysians, especially students to avoid areas where the riots are taking place,” he said last night.

Young thieves: Rioters looting a shop in Hackney, North London. — EPA

 

Anifah said the Malaysian High Commission was keeping in touch with the Malaysians in and around London.

“We are also trying to get in touch with any Malaysians who may have travelled to London.

“I hope they will be able to report their whereabouts to the Malaysian High Commission there,” he said.
He urged Malaysians to contact Wisma Putra or the Malaysian High Commission if they needed assistance or clarification.

The contact persons at Wisma Putra are Zul Kesli Abdullah at 03-8887 4353 or Faisal Abdul Hamid at 03-8887 4353, while the contact persons at the Malaysian High Commission are the deputy high commissioner Wan Zaidi Wan Abdullah at +44-020-79190242 or wzaidi@kln.gov.my.

Malaysian High Commissioner to Britain Datuk Zakaria Sulong said although it had not received any distress call from Malaysians, it had taken the move to advise citizens to look after their safety.

“The High Commission has also posted similar advice on our website,” he said.

Rural and Regional Development Minister Datuk Seri Mohd Shafie Apdal said Mara had taken precautionary measures to relocate its students from high-risk areas to Leices­ter Square to ensure their safety.

Violence causing jitters among Malaysians

PETALING JAYA: The violent unrest that spread to several parts of London and Britain is causing jitters among Malaysians.

Many Malaysian students were worried for their safety, particularly Muslims, who have to travel to London’s Malaysia Hall at Queensway to break fast and for terawih pra-yers.

Recalling Monday’s rioting, London Umno Club president Dzuhair Hanafiah, 30, said shops about 600m from Malaysia Hall were looted.

“We heard loud noises but police came moments later to take control of the situation, but it still created fear among the students,” he told The Star yesterday.

He said rioting had spread to other places including Birmingham, Bristol and Liverpool.

“Each area has different local issues like high unemployment rate, government policy issues and gangsterism,” he said.

He urged Malaysians who were injured to contact the club or the Malaysian Students Department (MSD) for help.

“We advise Malaysians to be careful and anyone affected by the riots must immediately contact the MSD or London Umno Club at info@umnolondon.com or call +44-743-564-4040,” he said.

Student, Basir Radzali, 21, said many Malaysian students chose to stay indoors as universities were on summer break.

“Many of us try to avoid going out since the riots started, especially to areas like Hackney, Croydon and Peckham,” he said.

He said the Malaysian High Commission had sent out SMSes to students to be vigilant.

Tan Chang Jin, 24, who lives in Tower Bridge, central London, said the riots had not yet reached his neighbourhood, although it was on high alert.

“Hopefully, the riots will not spread. For now I’m in close contact with my friends and family,” said Tan.

Owner of the Rasa Sayang restaurant chain Teddy Chen said the situation in central London was getting worse.

“It is waiting to explode. Some of them have bad intentions and will take any opportunity to riot,” he said.

Poverty, ethnic differences fuel chaos

By Zhang Haizhou (China Daily)

LONDON - As violence spread across the British capital in a second night of looting and chaos in the northern London suburb Tottenham, people began to ask why.

A list of causes, including high unemployment, spending cuts amid Britain's sluggish economic recovery, cultural or ethnical differences and a poor relationship between youth and police, have been picked up by local media and analysts.

Take Haringey, the borough in which Tottenham is situated. With a population of 225,500, it is listed as the fourth-most-deprived borough in London and the 13th-most in the country.

About 55 percent of Haringey residents are among some of the most economically deprived in Britain, according to the borough's official statistics.

Lambeth, home borough of Brixton, has a similar situation. The 2007 Indices of Multiple Deprivation places it as the fifth-most-deprived borough in London and 19th in England.

In Tottenham, the core of the borough of Haringey, more than 10,000 people claim Jobseeker's Allowance, an unemployment benefit. Recent government statistics show each registered job opening in Tottenham draws 54 applicants.

Despite a small decline in reported crime in the year to June 2011, compared with the previous 12 months, Haringey saw more burglaries and an alarming rise in robberies of individuals - an increase from 884 offenses to 1,204.

Eight of Haringey's 13 youth clubs were closed because of spending cuts, and reductions in community police officers are soon to come, the Guardian reported.

Edmonton, just across the borough border in Enfield, has become grimly associated with fatal stabbings of teenagers in recent years.

"There is every indication, as unemployment climbs and as cuts are made in youth clubs and other services, that the sense of alienation will burgeon. Crime figures have been climbing again," the Guardian said.

But economic conditions alone cannot explain what has been happening in London the past two nights.
"The Tottenham riot has rekindled memories of the wave of unrest which swept through Britain's cities in the 1980s," the Telegraph wrote.

In addition to a recession and spending cuts, the newspaper cited "poor relations between the black community and police" as part of the backdrop against which violence erupted in Bristol, Birmingham, Manchester, Liverpool as well as Brixton and Broadwater Farm in London in the 1980s.

Haringey and Lambeth are highly multicultural and multi-ethnical.

Roughly 48.7 percent of Haringey residents belong to non-white British ethnic groups, a higher percentage than in both London as a whole (40.2 percent) and England and Wales (13 percent), according to official statistics.

Thirty-eight percent of Lambeth's 272,000 residents have ethnic minority backgrounds, and 50 percent are white British. Over 130 languages are spoken in the borough.

The police were accused of "institutional racism" for their handling of the 1980s riots and calls were made for sweeping changes in how the police department was run, including a rapid increase in the number of black and Asian recruits.

In recent years, it has been assumed that "the mutual antipathy between police and the black community was a relic of the 1980s".

"Events in Tottenham may suggest that such optimism may yet prove to be premature," the Telegraph reported.

But residents say that the weekend's riots in Tottenham have little to do with cultural or ethnical anxieties.

"Race may have a little part to play, but there are other issues in there as well ... It's young people and the police, but not a black and white thing at all," Norma Jones, 48, who works in human resources in Tottenham, said on Sunday.

While the police have condemned the rioters, most of whom are young people, many residents blame the police for their mishandling of ties with youth in these areas.

"There are still areas in Britain where people or communities have a very difficult relationship with the police," said Max Wind-Cowie, head of the progressive conservatism project at London-based research institute Demos.

"There are a small number of people who want no constraints on their behavior, and this isn't about social or economic disempowerment. This is a section of the community that resents the police policing them," he said.

Riots spread from London to England's northern, midlands cities

(Xinhua)

Police officers ask questions near a burnt building in Croydon, south London, Britain, Aug. 9, 2011. British authorities have largely reinforced the police force on London streets following the riots happening three consecutive nights from Saturday. Some 16,000 police officers, five times the usual number, will be on duty on London streets for three days. (Xinhua/Zeng Yi)

LONDON, Aug. 9 (Xinhua) -- Riots again hit Britain on Tuesday evening for the fourth night in succession, with significant violence in the northern industrial city of Manchester as well as minor violence in London.

Police had posted 16,000 officers on the streets of London to prevent a repeat of Monday night's scene of arson, looting, muggings and assaults that took place as hundreds of rioters clashed with police in many parts of the city.

In Manchester city center police were engaged in running battles through the early and mid-evening with a crowd which eyewitnesses said was about 2,000 strong. Shop windows were smashed and a women's clothes shop was petrol-bombed, and several businesses -- including a jeweler's and clothes shops -- were looted.

Earlier police had clashed with a much smaller group of youths in the neighboring city of Salford, where a community building was set on fire and several businesses attacked.

Police in the West Midlands reported trouble in Birmingham city center, where there had been trouble on Monday night, and also in the town of West Bromwich and the nearby city of Wolverhampton, which had both been spared violence on earlier nights.

In Birmingham, a 200-strong gang of youths with sticks was confronted by riot police amid reports of attacks on shops and a car being set on fire.

Police in Wolverhampton had made 20 arrests by mid-evening. In West Bromwich hooded youths blocked a road and set fire to dustbins but later dispersed after burning two vehicles.

In the east London area of Canning Town, some youths were reported to have built barricades and stoned passing vehicles.

Also in London, theaters in riot-hit areas such as the Battersea Arts Center, the Dalston Arcola and the Greenwich Playhouse, cancelled their evening's performances, and shops in many parts of London closed earlier than usual. Many office workers left earlier to avoid being in the city if rioting began again.

Riot police seal off a street in Croydon, south London, Britain, Aug. 9, 2011. (Xinhua/Zeng Yi)

Police officers seal off a street in Croydon, south London, Britain, Aug. 9, 2011. (Xinhua/Zeng Yi)

 Police officers seal off a street in Croydon, south London, Britain, Aug. 9, 2011. (Xinhua/Zeng Yi)

 A police officer is seen near a burnt building in Croydon, south London, Britain, Aug. 9, 2011. (Xinhua/Zeng Yi)

Police officers are seen on a vandalized street in Croydon, south London, Britain, Aug. 9, 2011. (Xinhua/Zeng Yi)

Police officers are seen near a burnt car in Woolwich, southeast London, Britain, Aug. 9, 2011. (Xinhua/Bimal Gautam)

A police officer investigates on a street in Woolwich, southeast London, Britain, Aug. 9, 2011. (Xinhua/Bimal Gautam)

Police officers secure a burnt building in Woolwich, southeast London, Britain, Aug. 9, 2011. (Xinhua/Bimal Gautam)

Police officers secure a burnt building in Woolwich, southeast London, Britain, Aug. 9, 2011. (Xinhua/Bimal Gautam)

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Al-Qaeda makes US Debt Downgrade?

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What al-Qaeda Has to Do With Debt Downgrade

By Gary Weiss

BOSTON -- With every day of market decline and economic pain, we need to face a terribly unpalatable question, and it's not whether Standard & Poor's is credible or if the downgrades will send the economy into a tailspin (or, perhaps, if we are already in a tailspin). 

Sure, the downgrade of U.S. long-term debt by Standard & Poor's appears to be a cynical ploy by this tarnished credit-rating agency, perhaps trying to burnish its reputation at a time when parent McGraw-Hill is in play. But there's no question that the content of its downgrade report is correct, even if its initial arithmetic was off. The fact is that our political processes are a mess. We don't deserve a top credit rating.

But there is, I think, a deeper reason for the misery we're experiencing. I'll put it in the form of a question: Is al-Qaeda winning the economic struggle?
Image via Wikipedia

I know, bin Laden's dead, al-Qaeda is on the run, etc. etc. And I don't mean that al-Qaeda has won militarily, though even that is debatable -- can anyone say with confidence what will happen to Afghanistan and, of course, Iraq after a U.S. withdrawal? But I think that a strong case can be made that al-Qaeda has gone a long way toward achieving one of its primary war aims, which was to sabotage the U.S. economy. Bin Laden may be fish food, but his strategy seems to have worked. We are being bled white, thanks in large part by the war that he forced us to fight -- and we have our representatives in Washington, and their ideologically driven refusal to increase taxes, to blame for this mess.

First, let's go back to the bin Laden "we'll bleed you" tape. This is not an urban legend, but was widely publicized at the time. In October 2004, al-Qaeda distributed a bin Laden video that contained a departure from his usual invective. Instead of inveighing against U.S. Imperialists, Jews and so on, he spent nearly 20 minutes talking not like a terrorist chieftain in a cave but the former corporate executive that he used to be, analyzing with satisfaction an objective that al-Qaeda was clearly achieving.


http://townipproject09.wikispaces.com/file/view/al-qaeda-osama-bin-laden-ayman-al-zawahiri.jpg/70861019/al-qaeda-osama-bin-laden-ayman-al-zawahiri.jpg

For every dollar al-Qaeda spent, he said, the U.S. was coughing up $1 million in war spending and economic misery. "As for the size of the economic deficit, it has reached record astronomical numbers" -- over $1 trillion, bin Laden said. Actually bin Laden's math was off -- the deficit in 2004 was just over $400 billion, but his general point was correct. The deficit had reached astronomical numbers, and much of that was because of the war that he started and Congress' stubborn refusal to pay for it by asking for sacrifice from the nation's fat cats.

We had to fight the war in Afghanistan, but we didn't have to mismanage the way it was financed.

Since October 2001, the war in Afghanistan has cost more than $443 billion. This year, taxpayers will pour another $118 billion into that quagmire, which is continuing to sap far too many U.S. lives, and with far too little assistance from our NATO allies. Factoring in the cost of the unnecessary war in Iraq, and the price tag of these two wars, paid for by the federal equivalent of a line of credit, has exceeded $1 trillion since 2001.

It was easy for bin Laden to ruin our economy. All he had to do was to exploit the natural tendency of the Bush administration to be incompetent. His primary Fifth Columnists are red-state congressional representatives, rock-ribbed Republicans who believe that you can fight two wars without paying for them.
Rather than raise taxes on the rich and cut loopholes to finance the war, the Bush administration let its 2001 tax cuts remain unchanged. The total cost of the tax cuts roughly approximates the cost of the Iraq and Afghanistan wars, and by some estimates is even higher -- as much as $1.3 trillion.

If that estimate is correct, then simply repealing those tax cuts would have paid for the Iraq and Afghanistan wars, and we might even have had a few billion left over.

The war to destroy the economy has continued, with impressive results. Now there's talk of cutting long-established social programs, the so-called "entitlements," because President Obama acquiesced to a deficit-reduction program without revenue increases -- and because he refused to invoke the 14th Amendment, which holds that the national debt is not to be questioned.

The result was a deal to cut spending in the middle of a looming recession and two wars. It's nothing short of crazy. Nobody could have done a better job of mismanaging the economy -- not even bin Laden himself if he had been the leader of the Congressional Tea Party Caucus, holding America hostage on behalf of an extremist ideology. Sen. John Kerry has correctly described the S&P downgrade as a product of the Tea Party movement and its allies in Congress. Do you really think that S&P would have piled on with its downgrade if Washington hadn't gone haywire? I have a lot of respect for S&P's integrity -- I worked for another McGraw Hill subsidiary for 18 years -- but I doubt it very much.

One can question the appropriateness of a credit-rating agency -- any credit-rating agency -- having the gall to take an action so disruptive to the markets, when one considers their squalid role in the subprime scandals. But there is no question that the U.S. government deserved the downgrade. Our legislative branch just isn't working, that affects the creditworthiness of the nation, much as private companies run with weak corporate governance would be hard-pressed to win an AAA rating.

The events of the past few weeks have demonstrated what we've known for decades: that you don't negotiate with terrorists, whether they are al-Qaeda thugs or extremist Congressmen who utilized the phony, artificial, unconstitutional "debt limit" to force their ideological agenda on an unwilling American people.

It's sad, but true: The terrorists are winning.

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Stronger Malaysian ringgit seen

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Stronger ringgit seen

BY DALJIT DHESI daljit@thestar.com.my

Economists expect the ringgit to strengthen further against the US dollar

PETALING JAYA: Economists expect the ringgit to further strengthen against the greenback and attract extensive capital inflow into the region. It will also lead to possible further hikes in statutory reserve requirement (SRR) to stem excess liquidity if the global financial volatility worsens following the US credit rating downgrade.

Standard and Poor's (S&P's) had last Friday downgraded the world's largest economy a notch lower to AA+ from a triple A rating since the credit rating was issued to the US in 1917.

MIDF Research chief economist Anthony Dass said he expected the ringgit to strengthen against the US dollar at an average 2.97 for the year supported by a combination of healthy economic fundamentals and strong inflow of liquidity.

Stronger ringgit: Dass expects the ringgit to trade at an average 2.97 to the greenback for the year.

He added that the stronger ringgit against the US dollar would help cushion some level of imported inflation, which would give some breathing space for Bank Negara on further raising the overnight policy rate (OPR), which now stood at 3%.

“We have now placed a 30% odd for the OPR to stay at 3% for the rest of the year and expect the central bank to raise it by another 25 basis points (bps) in the second half of this year,” Dass said.

Much depends on the direction of the ringgit, the global commodity and food prices, liquidity and whether there will be further relaxation of subsidies.

Underpinned by healthy economic fundamentals and benefiting from the regional net inflow of funds, liquidity inflow into Malaysia has been strong, forcing the central bank to raise the SRR by 300 bps to 4% between April-June 2011. SRR are non-interest deposits kept at the central bank to mop up excess liquidity in the financial system.

With lingering uncertainties on the global front, Dass said he expected Malaysia, like other Asian ex-Japan economies, to continue to see inflow of funds. While this would strengthen the ringgit, he said ample liquidity would add pressure on inflation, adding that he was not ruling out the possibility of further hikes in SRR by another 50 bps to 100 bps should the inflow of liquidity pose a problem.

RAM Holdings economist Jason Fong, in response to a query from Starbiz, said if the financial volatility in the US turned out to be very significant and persistent, the impact on its external markets, including Malaysia, could be substantial.



One of the worst case scenarios would entail extensive capital flight from US-centric assets, he said. In this scenario, he added that there would be considerable decline in the value of the US dollar, causing an appreciation of US-denominated assets, particularly commodities.

The US financial volatility might also cause investors to put their money into safe haven assets such as precious metals, like gold, Fong noted.



Furthermore, he said if there were further US debt rating downgrade within the next two years as pointed out by S&P, then banks (depending on its portfolio weightings in US Treasuries) might slow down lending activities to meet international banking guidelines and this could slow domestic lending and cause consumption and investment to decline.

Fong said a larger-than-usual capital inflow would likely put upward pressure on the ringgit, causing Malaysia's exports to be more uncompetitive.

He said the rating agency maintained its economic growth forecast of 5.6% for Malaysia this year but acknowledged that the downside risk to growth had risen in the last few months.

This included a prolonged US slowdown coupled with a deteriorating external economic environment, he noted.

AmResearch Sdn Bhd director of economic research Manokaran Mottain reckons that the impact on Malaysia from the US credit rating downgrade will be minimal as the local economy is more domestic-oriented.

Countries more exposed to US Treasuries, including Japan and China, would face the brunt in the near term. China would be pressured to ease the grip on a weaker yuan policy, he added.

For Malaysia, the biggest impact will be in the currency market, with the ringgit rallying again towards RM2.93 per dollar again. The ringgit was traded at RM3.019 to a US$1 yesterday.

In the medium term, a possible quantitative easing (QE3) in the US would lead to the appreciation of the regional currencies, including the ringgit - which is expected to rally towards RM2.90 per dollar before settling between the RM2.80-RM2.90 range for this year.

Manokaran, who is maintaining the country's gross domestic product forecast at 5% this year, said the Government had trimmed its exposure to the G3 and plans to boost domestic demand. Apart from the US, the G3 also include Japan and the European Union.

US downgrade spells more chaos; QE3 in the making; Time for US to stop blames, take responsibility!

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Downgrade spells more chaos

Global Trends By MARTIN KHOR

The US credit downgrade – coming after a weak solution to its debt ceiling crisis and signs of a new recession – is signalling greater turmoil ahead in the global economy.

LAST week was a tumultuous time for the global economy as stock markets plummeted on a series of bad news in the United States and Europe. But this may only be the start.

This week is likely to usher in even more turmoil as the prospects for recovery have suddenly turned negative.

After several other dramatic events, last week ended with the US’ credit rating losing its AAA status to AA+.

It was only one notch down, this downgrade was by only one (Standard and Poor’s) out of three rating agencies, and it had been half expected.

Nevertheless, it marks the end of an era. For the first time since 1917, the US does not enjoy an AAA rating.

It has long been assumed that the US dollar and its Treasury bills are the safest of havens.

There may be some practical effects of the downgrade as some funds which prefer or are allowed to only invest in AAA investments may have to find alternatives.

The US dollar is also expected to depreciate further, thus raising fresh questions about the role of the dollar in global trade and as the world’s reserve currency.

Manufacturers and traders are asking whether they should trade their goods in currencies other than the US dollar to avoid making losses.

This was shown in yesterday’s Sunday Star report on the reactions of Malaysian businessmen to the news of the downgrade.

The Federation of Malaysian Manufacturers’ president Tan Sri Mustafa Mansur urged Malaysians to consider trading in Chinese renminbi (as China is poised to be the world’s largest economy and a lot of Malaysia’s trade is with China) and in other currencies to avoid losses in export earnings from the continuing use of the US dollar.



Besides the use of the dollar as the main medium of exchange (the currency for global trade), it is also, by far, the world’s most important reserve currency, thus making it the global store of value.

Since almost all countries hold a major portion of their foreign reserves in US dollar assets (especially US Treasury bills), there has been increasing fears worldwide over the safety and value of their US investments.

First, there was the scare of possible default by the US Government in debt servicing, because of the White House-Democrats-Republican wrangling on the government’s debt ceiling.



On Aug 1, just a day before the deadline, a deal was struck in which the debt ceiling would be raised by US$2.1 trillion (RM6.32 trillion), provided the government slashes the same amount in its budget deficit over 10 years, with the bulk of how to do so to be decided by a bipartisan committee later.

This gives temporary respite, and the world will likely witness a repeat of the messy Washington budget conflict when the committee starts work.

As a caustic commentary in Xinhua news agency put it, the higher debt ceiling “failed to defuse Washington’s debt bomb for good, only delaying an immediate detonation by making the fuse an inch longer”.

Second, the S&P’s credit downgrade has articulated the fears of the investment and policy-making circles.

The confused and confusing atmosphere surrounding Washing­ton politics has seriously eroded confidence in the ability of the US to handle its budget, debt, fiscal, financial and economic policy issues.

Only political analysts who specialise in US politics can fully explain and anticipate the intricacies and implications of the views and tendencies of the various branches of the Republican Party (especially its Tea Party component and its effects on the Party’s congressional positions), the Democratic Party and the Administration.

But even non-specialists comprehend that there is a serious governance problem in the US which is affecting the rest of the world.

Its political system is experiencing a gridlock which will affect the US dollar, the US economy and the world economy’s prospects for what seems to be a long time to come.

Third, the US economy shows increasing signs of stalling leading to a new recession.

Last week’s indicators for consumer spending, manufacturing and services output were negative, and some prominent economists gave a 50:50 chance of a double dip recession.

Recession is made more likely by the inability of the Obama administration to take effective recession-busting measures.

Congress will block any new significant fiscal stimulus (as the debt ceiling crisis and solution show), while a new round of printing and injecting money through quantitative easing, which is being considered, may only have limited positive effects.

All these point to a further weakening of the US economy and the US currency, at least in the short term.
These three developments, all in one week, have galvanised those in business, trade, finance and policy making to re-think the role of the dollar and the US economy in the global economy.

In the short run, it is difficult to find alternatives to the dollar as a unit of exchange or as a store of value, mainly because the euro is in a crisis of its own, the Japanese economy faces its own difficulties and the Chinese currency is not convertible enough.

But many agree that in the long run, a solution or solutions must be found. Otherwise, the global trading and monetary systems could be in a disarray.

There is nothing like a crisis or an emergency to collapse a long run into a short run.

If the US and European crises continue to unfold without respite, the world is in for financial and economic turmoil similar to or even worse than the recent 2008-2009 great recession.

Solutions will therefore have to be urgently sought.

Smaller QE3 may be necessary to prevent US double dip recession

By YAP LENG KUEN  lengkuen@thestar.com.my

PETALING JAYA: With the US economy possibly sliding into a double dip recession soon, there are expectations of a third round of quantitative easing (QE3), which may involve smaller amounts.

“It is not a popular decision but may be the only reaction from the US Fed to keep the economy going,'' said Pong Teng Siew, head of research at Jupiter Securities.

“The Fed has limited options especially with no more government spending to stimulate the economy. Fiscal policy that involves government spending is out in the wake of arguments related to the US debt ceiling where the only acceptable solution to the Republicans is to cut spending, and not raise revenue.

“QE3 may involve smaller purchases of Treasury instruments at the longer end of the yield curve. This may help to drive down the yield where the medium term rates may also move down in tandem. In this way, interest costs may also be reduced.

 

“This time, there are less resources available, hence probably smaller amounts under QE3. Also, the market itself may reject larger amounts,'' said Pong.

There may be a resultant boost to the stock markets on a smaller scale. However, the European debt problem especially in Italy represents a situation that is likened to an elephant in a room.''

“As long as there are upward pressures in the Italian government bond yields, there will be downward pressure on the stock markets in Europe,'' said Pong, adding that investors should stay light on selected plantation, oil and gas and consumer-related companies.

Bloomberg reported on Friday that the difference in yield, or spread, between Italy's 10-year bond and German bunds widened to 389 basis points on Thursday, after closing at 368 basis points the previous day.

 Lee: ‘This time round, headline and core inflation have been creeping up.’

It said Spain's 10-year spread also rose six basis points to 398, as European Central Bank debt purchases failed to reassure investors that officials in the region would solve the sovereign crisis.

QE refers to the Fed's decision to buy US Treasury bonds in an attempt to inject liquidity into the market.

The previous rounds of QE1 and QE2 had not produced a lasting impact on the US economy which is holding the weight of inflation and higher debt levels.

CIMB Investment Bank head of economics Lee Heng Guie said full-year growth estimate for the US economy had been revised from 2%-3% to 1.5%-2%, raising the odds of a double dip recession by 30%.

Moreover, the cut in the US credit rating by Standard & Poor's would have a double whammy impact on the lethargic economic recovery in the US, Lee added.

In a recent update, Lee noted that the US second quarter real gross domestic product growth came in at a tepid annualised rate of 1.3%, short of the 1.8% consensus forecast.

Consumer spending in the United States, hurt by higher gasoline prices and auto chain supply disruptions, rose by only 0.1% (2.1% in Q1), the slowest in two years.

“We expect the Fed to take more actions, such as buying of bonds, if the economy appears in danger of stalling,'' said Lee.

However, he does not think that inflation and inflation expectations are heading towards the point which would prompt the Fed to consider further large asset purchases.

Lee recalled that before the second phase of quantitative easing (QE2) was implemented, the trend of disinflation and deflationary risk formed a strong case for the Fed to pump in extra liquidity.

“This time round, headline and core inflation have been creeping up,'' he said. “With inflation and unemployment rising at the same time, the Fed will find it difficult to justify yet another cash injection.''
Should the Fed detect firmer signs that the US economy is faltering, it may:

• Adjust forward guidance to push back timing expectations on the first rate hike.

• Shift back market expectations on when it will shrink its balance sheet. (In April, Fed chairman Ben Bernanke had signalled that the Fed may reinvest the proceeds from its bond purchase when they mature).

•  Intervene in the credit market through direct loans or adjust interest rates payable on bank reserves to spur bank lending.

 Other economists expect slower growth in the United States but not necessarily recession.

A banker told StarBiz that banks in general were adopting a cautious stance in view of the world and eurozone economic conditions.

“The US leaders have mainly taken temporary measures but the real issues like debt are not addressed,'' he said. “The debt problem remains while their agreements have to be bipartisan.

“From their behaviour, there seems to be a lot of politicking in the US especially on the economy. As a world leader, that does not give a good picture to the whole world.

Their decision to cut US$2.4 trillion or more in spending in ten years will have an impact on the world economy. Hopefully, for Malaysia, the economic transformation projects and its own economic growth will provide the momentum forward.

“The business is there but banks have turned cautious on lending and are diversifying into services, fee-based income, niche areas and wealth management,'' said the banker.

 Commentary: It's time for U.S. to stop blames, take responsibility

(Xinhua)

The White House on Saturday challenged the ruling by Standard & Poor's to downgrade U.S. long- term credit rating form top rank of AAA to AA+, citing the agency' s decision relied on faulty math and in haste.

Disappointingly, instead of reflecting on themselves and sitting down to fix problems in a cooperated way, the Democrats and Republicans in Washington are questioning the creditability of the downgrade ruling and blaming each other for the ever-first shame of slipping out top credit rating club.

During the angry finger-pointing, the U.S. politicians seemed to have forgotten Wall Street's severest losses in almost three years last week, forgotten mounting concerns about double-dip recession, and forgotten the criticism over their irresponsibility showed during the debt arm-twisting from all over the world.

The world has seen enough useless bipartisan debate. The bond- holders are losing confidence. The investors have started to escape markets to stay in cash, showing their fears of uncertainty.

S&P managing director John Chambers said "The political gridlock in Washington leads us to conclude that policymakers don' t have the ability to put the public finances of the U.S. on a sustainable footing ".

The alarm has rung. It is time for the naughty boys in Washington to stop chicken games before they cause more damages. It is time for the policy-makers in Washington to settle down, to show some sense of responsibility and fix their fiscal problems.

The United States is not only the biggest debtor, who must pay its large amount of obligations, but also the printer of international reserve currency, which has the responsibility to assure the value of other countries' foreign reserve assets.

If the country's governors kept wrangling for their own interest, ignoring the voices from domestic and aboard, how can their people trust them and where will the confidence for a better economic scenario come from?

If the world's largest debtor kept eating May's grain in April and kept robbing Peter to pay Paul without fiscal discipline, eagerness to balance budget or effective efforts to boost sluggish economy, how can the creditors keep lending without doubts?

According to analysts, risk of dollar devaluation increased after this downgrade, not to speak of the possibility to see more cuts in the next two years with a negative credit rating outlook.

Whether admitted or not, the U.S. central bank tended to maintain a cheap dollar for the export's sake aftermath the financial crisis, which already squeezed world foreign reserves.

Currently, the U.S. is facing a high unemployment rate of 9.1 percent and almost stalled economic growth. But the Federal Reserve's "silver bullets" have run out after two round of quantitative easing. For fiscal stimulus, there is only little room considering the excessive debt and austerity agreement. For the desperate policymakers, to boost export seems to be the last way to kick the U.S. economy. From this point, the U.S. has every motive to maintain a weak dollar.

Before the U.S. makes any move, please remind it: don't forget your responsibility as the issuer of reserve currency to maintain the stable value of the dollar. Don't become blind to the great risks that a fluctuated exchange rate could pose to international financial markets and a weak greenback could pose to the world fragile economic recovery by lifting dollar-denominated commodities prices.

The history is a guide. What we should learn from the financial crisis is to be selfish could only hurt yourself and drag others into water.

It is time for the U.S. to tighten belts and solve structural problems, in order to resume reputation and restore world confidence. 

 Latest US and global market and business news, pictures and videos from AP-Wire  

US loses AAA credit rating, why? Dollar sluggish, Trade in RMB!

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US loses AAA credit rating from Standard & Poor’s

 
The White House maintained silence in the immediate aftermath of S&P downgrade. — Photo by AFP

NEW YORK: The United States lost its top-notch AAA credit rating from Standard & Poor’s on Friday in an unprecedented reversal of fortune for the world’s largest economy.

S&P cut the long-term US credit rating by one notch to AA-plus on concerns about the government’s budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the American government, companies and consumers.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government’s medium-term debt dynamics,” S&P said in a statement.

The decision follows a fierce political battle in Congress over cutting spending and raising taxes to reduce the government’s debt burden and allow its statutory borrowing limit to be raised.

On August 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good “down payment” on fixing America’s finances.

The White House maintained silence in the immediate aftermath of S&P downgrade.

The political gridlock in Washington and the failure to seriously address US long-term fiscal problems came against the backdrop of slowing US economic growth and led to the worst week in the US stock market in two years.

The S&P 500 stock index fell 10.8 per cent in the past 10 trading days on concerns that the US economy may head into another recession and because the European debt crisis has been growing worse as it spreads to Italy.

US Treasury bonds, once undisputedly seen as the safest security in the world, are now rated lower than bonds issued by countries such as Britain, Germany, France or Canada.

‘Daunting implications’

As the focus for investors shifted from the debate in Washington to the outlook for the global economy, even with the prospect of a downgrade, 30-year long bonds had their best week since December 2008 during the depth of the financial crisis.

Yields on 10-year notes, a benchmark for borrowing rates throughout the economy fell as far as 2.34 per cent on Friday — their lowest since October 2010 — also very low by historical standards.

“To some extent, I would expect when Tokyo opens on Sunday, that we will see an initial knee-jerk sell-off (in Treasuries) followed by a rally,” said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

The outlook on the new US credit rating is “negative,” S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months.

“The long-term implications are daunting. Short-term, Treasuries remain a premier safe-haven refuge,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.



Borrowing costs could rise

The impact of S&P’s move was tempered by a decision from Moody’s Investors Service earlier this week that confirmed, for now, the US Aaa rating. Fitch Ratings said it is still reviewing the rating and will issue its opinion by the end of the month.

“It’s not entirely unexpected. I believe it has already been partly priced into the dollar. We expect some further pressure on the US dollar, but a sharp sell-off is in our view unlikely,” said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

“One of the reasons we don’t really think foreign investors will start selling US Treasuries aggressively is because there are still few alternatives to the US Treasury market in terms of depth and liquidity,” Serebriakov added.

S&P’s move is also likely to concern foreign creditors especially China, which holds more than $1 trillion of US debt. Beijing has repeatedly urged Washington to protect its US dollar investments by addressing its budget problem.

Obama administration officials grew increasingly frustrated with the rating agency through the debt limit debate and have accused S&P of changing the goal posts in its downgrade warnings, sources familiar with talks between the administration and the ratings firm have said.

The downgrade could add up to 0.7 of a percentage point to US Treasuries’ yields over time, increasing funding costs for public debt by some $100 billion, according to SIFMA, a US securities industry trade group.

S&P had placed the US credit rating on review for a possible downgrade on July 14 on concerns that Congress was not adequately addressing the government fiscal deficit of about $1.4 trillion this year, or about 9.0 per cent of gross domestic product, one of the highest since World War II.

The unprecedented downgrade of the nation’s AAA credit rating by a major ratings agency comes only 15 months before the next presidential election where the downgrade and the debt will be top issues for debate.

Bitter political battles remain over the ideologically fraught issues of spending cuts and tax reform.

The compromise reached by Republicans and Democrats this week calls for the creation of a bipartisan congressional committee to find $1.5 trillion of deficit cuts by late November, beyond the $917 billion already identified.

Why S&P downgrades US credit rating?

The credit rating agency Standard & Poor's on Friday cut the United States' credit rating to AA+ from AAA, citing three fundamental reasons for the downgrade, the first ever in US history.

Debt burden worry

According to S&P's judgment, the debt situation of the United States doesn't satisfy the requirement of an AAA rating.

S&P compared US debt with the other four countries with AAA ratings: Canada, France, Germany and Britain.

It estimated the five countries will have net general government debt to GDP ratios this year ranging from 34 percent of Canada to 80 percent of Britain, with the US debt burden at 74 percent.

S&P predicted the net public debt to GDP ratios will range between 30 percent of Canada and 83 percent of France, with the US debt burden at 79 percent.

Although the US ratio of net public debt to the GDP was not the highest among the five countries, the rating agency projected that the net public debt burden of the other four countries will begin to decline, either before or by 2015.

Fiscal plan "not enough"

On August 2, US President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years.

However, according to S&P's calculations, a good "down payment" on fixing the country's finances would be at least $4 trillion.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said.

The rating agency believed the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicated that further near-term progress containing the growth in public spending, especially on entitlement, or on reaching an agreement on raising revenues is less likely than previously assumed and will remain a contentious and fitful process.

Lose faith on policy makers

S&P questioned US policy makers' eagerness to solve the debt problems by bipartisan efforts. Also, the rating agency blamed Democrats and Republicans for ignoring its earlier warnings.

On April 18, S&P assigned a negative outlook to US then-AAA rating, warning the debt ceiling should be raised to avoid a default. However, the action didn't draw much attention from policy makers who had decisive power to take quick measures.

The US debt would reach its ceiling of 14.3 trillion on August 2. If the debt ceiling was not raised, the United States would face an unprecedented default.

Through long, testy negotiations between the two parties in Congress, the plan was finally passed just before the August 2 deadline. However, patience and trust in US policy makers diminished as time went by.

"The effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned," S&P said.

Also, as the difficulties behind the debt problems still loom ahead, S&P worried that US policy makers could not react properly and effectively to the "government debt dynamics" any time soon, given their recent performance on dealing with the debt ceiling.

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3. Chinese ratings agency Dagong puts U.S. on watch for downgrade

US loses AAA credit rating after S&P downgrade

One of the world's leading credit rating agencies, Standard & Poor's, has downgraded the United States' top-notch AAA rating for the first time ever. 

 

News of the downgrade ended a tumultuous week for US finances

 

S&P cut the long-term US rating by one notch to AA+ with a negative outlook, citing concerns about budget deficits.

The agency said the deficit reduction plan passed by the US Congress on Tuesday did not go far enough.

Correspondents say the  downgrade could erode investors' confidence in the world's largest economy.

It is already struggling with huge debts, unemployment of 9.1% and fears of a possible double-dip recession.

The downgrade is a major embarrassment for the administration of President Barack Obama and could raise the cost of US government borrowing.

This in turn could trickle down to higher interest rates for local governments and individuals.

Analysis - Robert Peston Business editor, BBC News

The US losing its AAA rating matters. It is a very loud statement that there has been an appreciable increase in the risk - which might still be tiny, but it exists - that the US might one day struggle to pay back all it owes. Another important certainty in the world of finance has gone.

Of course many will argue - and already have - that the record of ratings agencies such as Standard & Poor's of getting these things right in recent years has been lamentably poor.

Think of all the subprime CDO products rated AAA by S&P that turned out to be garbage.

But S&P, Moody's and Fitch (and particularly the first two) still have a privileged official position in the world of finance: they determine what collateral can be taken by central banks from commercial banks, when those central banks lend to commercial banks.

However, some analysts said with debt woes across much of the developed world, US debt remained an attractive option for investors.

The other two major credit rating agencies, Moody's and Fitch, said on Friday night they had no immediate plans to follow S&P in taking the US off their lists of risk-free borrowers.

'Flawed judgement'

Officials in Washington told US media that the agency's sums were deeply flawed.

Unnamed sources were quoted as saying that a treasury official had spotted a $2 trillion [£1.2 trillion] mistake in the agency's analysis.

"A judgment flawed by a $2tn error speaks for itself," a US treasury department spokesman said of the S&P analysis. He did not offer any immediate explanation.

John Chambers, chairman of S&P's sovereign ratings committee, told CNN that the US could have averted a downgrade if it had resolved its congressional stalemate earlier.

"The first thing it could have done is raise the debt ceiling in a timely matter so the debate would have been avoided to begin with," he said.

International reaction to the S&P move has been mixed.

China, the world's largest holder of US debt, had "every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets," said a commentary in the official Xinhua news agency.

"International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," the commentary said.

However, officials in Japan, South Korea and Australia have urged a calm response to the downgrade.

The S&P announcement comes after a week of turmoil on global stock markets, partly triggered by fears over the US economy's recovery and the eurozone crisis.

With a bill to raise the US debt ceiling finally passed, the US has managed to avoid the catastrophic effects of a debt default. Now the focus has moved to the underlying economy and whether GDP is about to stall.

S&P had threatened the downgrade if the US could not agree to cut its federal debt by at least $4tn over the next decade. 

Instead, the bill passed by Congress on Tuesday plans $2.1tn in savings over 10 years.

S&P said the Republicans and Democrats had only been able to agree "relatively modest savings", which fell "well short" of what had been envisaged.

The agency also noted that the legislation delegates the lion's share of savings to a bipartisan committee, which must report back to Congress in November on where the axe should fall.

The bill - which also raises the federal debt ceiling by up to $2.4tn, from $14.3tn, over a decade - was passed on Tuesday just hours before the expiry of a deadline to raise the US borrowing limit.

S&P ratings (selected)

• AAA: UK, France, Germany, Canada, Australia
• AA+: USA, Belgium, New Zealand
• AA-: Japan, China

Source: S&P

S&P said in its report issued late on Friday: "The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government's medium-term debt dynamics.

"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges."

The agency said it might lower the US long-term rating another notch to AA within the next two years if its deficit reduction measures were deemed inadequate.

S&P noted that the bill passed by Congress this week did not include new revenues - Republicans had staunchly opposed President Barack Obama's calls for tax rises to help pay off America's deficit.

The credit agency also noted that the legislation contained only minor policy changes to Medicare, an entitlement programme dear to Democrats.

"The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed," it added.

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Moneychangers see sluggish trade in US dollar

By QISHIN TARIQ qishin.tariq@thestar.com.my
PETALING JAYA: Trade in the US dollar has been sluggish over the last week for moneychangers as customers “wait and see” which direction the currency will go.

“It has become a waiting game as people look for the best time to buy.

“Now, even trade in euros has slowed down,” said moneychanger Sahul Hamed, who operates the PJ Forex outlet at Bukit Bintang Plaza in Kuala Lumpur.

“With the current economic situation, customers are expecting the value to dip but are reluctant to buy when they feel it hasn't gone down by much.”

Anxious wait: The demand for US dollars could spike with a potential fall in the currency’s value following the downgrading of the US credit rating on Friday ->>

 

Moneychanger Jamil Akhbar Ali said there had been a dip in both sales and purchase of the US dollar despite the stable value of the currency over the last week.

“Most of our customers deal in Singapore and US dollars.

“While trade in the Singapore currency remains about the same, there are fewer people trading US dollars,” said the Petaling Jaya-based moneychanger.

Automotive engineer Meng Ng, 35, a Malaysian based in the United States for the last decade, said the exchange rate had not changed much since he last came to Malaysia four months ago.

“While the prices offered by moneychangers fluctuate slightly every day, on average the exchange rate has been pretty reasonable,” he said.

With the worsening US debt outlook and after US-based credit rating agency Standard & Poor's downgraded the US credit rating on Friday, speculation was rife that the US dollar would weaken considerably.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng said while the US currency would probably dip in the short term, he expected it to recover fairly quickly.

“When Japan's credit rating was downgraded from AAA status to AA+, its debt market was hardly affected with bond yields remaining relatively unchanged,” he said.

“The weakening US dollar would make imports from the country cheaper not only for large industries, but even for something as small as an online purchase.

“It's a double-edged sword though, as the US will lower its demand and import less when its economy is going through a soft patch.”

Trade in renminbi, says FMM

By YUEN MEIKENG  meikeng@thestar.com.my

 PETALING JAYA: Malaysia should consider trading in a different currency from the US dollar, such as the Chinese renminbi, to avoid being affected by the dollar's devaluation.

Federation of Malaysian Manufacturers (FMM) president Tan Sri Mustafa Mansur said people had to accept the fact that China was poised to be the largest economy in the world.

“We also export a lot to China and our business with the country has grown substantially since the enforcement of the Asean-China Free Trade Agreement,” he said yesterday.

Mustafa said many countries, which traded using the US dollar, including Malaysia, would stand to lose out as its exports would have a lesser value following the currency's downgrading.

“Based on this situation, we might have to look into the possibility of trading in a different currency,” he said.

Mustafa said this when asked to comment on the United States losing its coveted top AAA credit rating and its impact in Malaysia.

It was reported that credit rating agency Standard & Poor's downgraded the nation's rating for the first time since the US won the top ranking in 1917.

Mustafa added that it was also better for Malaysia to trade in ringgit as this would distance the country from any risk of further downgrading of the US dollar.

He said other currencies, which could also replace the US dollar were dinar, dirham or the Japanese yen.

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Washington and the Art of the Possible

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Raghuram Rajan

CHICAGO – These days, the United States media are full of ordinary Americans venting their rage at the incompetence and immaturity of their politicians. Even though the US government’s debt limit was raised in the nick of time, the process was – and remains – fraught with risk. Why, the public asks, can’t politicians sit down together like sensible adults and come up with a timely agreement that commands broad consensus? If we can balance our household budgets, they ask irately, why can’t our political leaders?

The reality, though, is that US politicians reflect the views of the American electorate – views that are fundamentally inconsistent. The absence of broad consensus is no wonder. Indeed, the last-minute agreement to raise the debt ceiling is proof that the politicians did what they were sent to Washington to do: represent their constituencies and only compromise in the interests of the country as a whole.

The key question is whether the political gridlock exposed by the debt-ceiling debate will worsen in the run-up to the 2012 presidential and congressional elections – if not beyond. That is possible, but we should not overlook cause for hope in what America’s politicians just accomplished.

Let’s start with why the electorate is so polarized. There are two key divisive factors: income and age. Income inequality has been growing in the US over the last three decades, largely because the labor market has increasingly demanded skills that the education system has been unable to supply. The everyday consequence for the middle class is a stagnant paycheck and growing employment insecurity, as the old economy of well-paying low-skilled jobs with good benefits withers away.



Until the financial crisis, the easy availability of credit, especially against home equity, enabled the middle class to sustain higher consumption despite stagnant incomes. With the collapse of the housing bubble, many people lost their jobs and health insurance, risked losing their homes, and suddenly had little reason for economic optimism. The response from America’s Democratic Party, which has traditionally represented this constituency, was to promise affordable universal health care and more education spending, while also protecting government jobs and entitlement programs.

When added up, such spending is unaffordable, especially with current federal revenues at just 15% of GDP. The solution for many Democrats is to raise revenues by taxing the rich. But the rich are not the idle rich of the past; they are the working rich. To balance the budget only by taxing the rich will require a significant increase in income taxes, to the point that it would lower incentives for work and entrepreneurial activity considerably.

This is not to say that taxes on the rich cannot be increased at all; but such increases cannot be the primary way of balancing the budget. Republicans, trying to give voice to many working Americans’ ambient uneasiness with rising government expenditures, as well as to the growing anger of the working rich, find it easier to defend a principle than a particular constituency. Hence their mantra: no additional taxes.

The neat divide based on income is muddled by the elderly. It is understandable that older Americans who have few savings want to protect their Social Security and Medicare benefits. However, even elderly Tea Party Republicans, who are typically against big government, defend these programs because they view them as a form of property right, paid for when they worked.

In truth, rising life expectancy and growing health-care costs mean that today’s elderly have contributed only a fraction of what they expect to receive from Social Security and Medicare. The government made a mistake in the past by not raising taxes to finance these programs or reducing the benefits that they promised. Unless the growth of these entitlement programs is curbed now, today’s young will pay dearly for that mistake, in the form of higher taxes now and lower benefits when they are old.

But the elderly are politically active and powerful. Not only do many defend their entitlements strongly; some oppose growth in other types of public spending for fear that it will weaken the government’s ability to pay for the benefits that they believe they are owed.

These then are the roots of America fiscal impasse, which has produced passionate constituencies viscerally opposed to compromise. Any political deal significantly before the debt-ceiling deadline would have exposed politicians to charges of betrayal from their constituents. And, given that President Barack Obama would ultimately be held responsible for a default, he needed the deal more than the Republicans did. So he had to coerce his party into accepting a deal full of spending cuts and devoid of tax increases.

Will the deal deliver what it promises? A bipartisan committee has to propose $1.5 trillion in deficit reduction by the end of this year, and Congress must either accept that proposal, or see immediate, politically painful expenditure cuts, which would include defense spending – an area that America’s Republicans care about strongly.

If this structure works as advertised, Congress will be forced to reach a compromise, which can be sold once again by politicians to their polarized constituencies as being necessary to avoid a worse outcome. This time, Obama’s Democrats will be on a level playing field, because both parties will be held equally responsible for a failure to reach a deal.

Ultimately, the big necessary decisions on curbing entitlement growth and reforming the tax code will probably have to wait until after the next election, giving the divided electorate an opportunity to reflect on its own inconsistency and send a clearer message. In the meantime, US politicians might have done just about enough to convince debt markets that America’s credit is still good. For that, Americans – and others around the world – should stop pillorying them and give them their due credit.

Raghuram Rajan, a former chief economist of the IMF, is Professor of Finance at the University of Chicago’s Booth School of Business and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy, the Financial Times Business Book of the Year.