S&P alert on the US economy strengthens the doomsayers' case

The news that Standard & Poor's, the ratings agency, has for the first time come out with a negative view on US sovereign debt has prompted apocalyptic forebodings

Is the US about to go bust?

I don't mean in some theoretical, can't-balance-the-budget kind of way; I mean in a down-the-drain, washed-up, history-altering way. Bust, flat broke, insolvent, belly-up, ruined, potless.

The news that Standard & Poor's, the ratings agency, has for the first time come out with a negative view on US sovereign debt has prompted those kind of apocalyptic forebodings. Some economists believe we are at a tipping point of history that will have awesome consequences.

One economic scenario being seriously considered by the financial pointy-heads is for the simultaneous collapse of both the US and Chinese economies, followed by all-out military confrontation between the world's two most powerful states.

All this from a seemingly geeky item of financial news from S&P to the effect that sometime in the next couple of years it might downgrade its 70-year-old AAA rating of US government bonds.

S&P's cast-iron, blue-chip rating has survived world wars, economic disasters and other global tragedies, but now there is a 33 per cent chance it will change from "stable" to "negative" in the near future.

If so, some Cassandras see that as the crucial event that could kick off the economic and political Armageddon referred to above.

Before we get too carried away with the "we're all doomed" scenario, let's just take into account a couple of pertinent facts.

First, this is a ratings agency. All of the members of that profession have had a hard time as a result of their failure to predict the financial collapse of 2008.

Indeed, their wholesale endorsement was given to many of the toxic financial instruments that produced the disaster. Their reputation for forecasting future events is still very low, and they might just be plain wrong.

Second, the American financial system has proved to be the most resilient model in the history of capitalism. It has survived and thrived in similar dire circumstances many times in the past.

The best financial brains in the world - on Capitol Hill and Wall Street - are working on it, and can be sure to find a solution, as they've always done.

Those are the positives, but when you look at the negatives your hands begin to tremble. The US economy is arguably in a worse financial position than any other advanced country. All others affected by the 2008 crash have either taken measures, such as the UK, to reduce public indebtedness, or had measures thrust upon them, such as Greece, Ireland and Portugal.

America alone has continued to try to spend its way out of recession, via the policy of quantitative easing. The result for the economy has generally been good, with all the data moving in the right direction, but the financial position is the worst in US history.

The Congressional Budget Office's 2010 projections show federal public debt at 66 per cent of GDP this year, rising to 90 per cent by 2021 and 150 per cent by 2031.

Long before then, the US would be as bust as any of the European basket cases.

But, as a recent book by British historian Niall Ferguson points out, the US would also be as bust as the Spanish Hapsburg emperors, the Bourbon kings of France or the Ottoman sultans of Turkey.

These are three examples from history of what happens to countries that borrow too much money - their whole social structure collapses, leading to extreme social and geopolitical consequences for the rest of us.

The doomsday scenario this time around is heightened by the fact that America's great creditor is also its biggest trading partner and financial supporter.

In the course of its rush to capitalism, China has embraced all things American, including its sovereign debt. A third of Beijing's massive foreign reserves, estimated at US$3 trillion (Dh11.01tn), is in the form of US bonds and dollar-denominated assets.

It's significant that, although S&P was the first western ratings agency to raise doubts about US sovereign debt, it was merely following China's Dagong agency, which last year downgraded US debt to "A-plus" from "AA".

When it comes to expert financial opinion, I'd take that of the creditor over the lender any day.

Now the US and China resemble nothing so much as an embittered married couple, locked into a prenuptial agreement signed in the love-struck days but now just about the only thing keeping them together.

When the break-up finally occurs, it will be excruciatingly painful for both of them - and for the rest of the world.

S&P's move could be the first real sign of impending divorce proceedings.