>> downgrading the credit rating of the united states, the white house lashes out on the flawed assessment by fitch ratings, what is worrying the financial experts? is the world's biggest economy in trouble? this is inside story. ♪ >> hello and welcome to the program. the credit score of the world's biggest economy downgraded. the rating agency fitch said it

evaluated, several factors before lowering america's schedule from aaa to aa plus. the core of the issue is spending, which many say is out of control. political divisions weigh heavily. will this downgrade sway investors? what impact will it have in washington, a year before the next u.s. presidential election? we will get to those issues with our guests in moment. this report, first. >> it is not the assessment the u.s. government was hoping for, but the rating agency fitch is defending its decision to downgrade america's credit score from aaa to aa please standby --aa please standby -- most analysts agree but say the downgrade hurts the u.s. treasuries ego more than the economy. >> the way i described it to our clients is if i was a pilot of our airplane and you were the

passenger, it is going to get very bumpy, put on your seatbelt, but the airplane is not going to crash. we're going to get to our destination which i think will be higher than today, both the s&p and the dow. >> the reasons for the downgrade include what fitch describes as an erosion of government, including contentious last-minute congressional debates in june over the $32 trillion debt ceiling. the attack on the capital two years ago, did not help. with in fighting between democrats and republicans brewing for years, analysts say it is now reached a boiling point. >> we are is polarized as we have ever been. we know that between the democrats, republicans. we can't reach agreements on anything. >> investors look at credit ratings to evaluate their own investments and assess risks. the u.s. treasury secretary, janet yellen launched this attack there get >> fitch and

the decision has launched an economic attack on the united states, i disagree with fitch's decision. it is unwarranted. >> while a aa plus credit score is considered very good, son -- of some investors believe the downgrade leaves the financial debt ahead of the u.s. presidential election next year. ♪ >> let's bring in our guests, william lee, the chief economist at the american non-profit think take, milk institute. he's my from nevada. a senior fellow at the business think tank. he is a former investment baker. in rochester, england, francis, an economist and banking

commenter. welcome. good to have you on this edition of inside story. the impact for the current situation is far-reaching, but internationally, short-term and long-term, how do you briefly assess the situation the u.s. is facing? >> the u.s. treasury market is at the core and foundation of the global financial system because every set is priced off of u.s. treasuries. when fitch lowers the rating it implies that they have lost confidence or are less confident that the u.s. government is able to contain it spending that keeps the debt rising at the size -- at the speed of the gdp or the u.s. economy. one of the worst things that can happen is spending gets out of control and the size of the debt starts to grow faster than the u.s. economy itself is growing because not implies the u.s. will be less able to pay the

outstanding debt. right now, the government is in a position where it can do something about it, but so far, fitch is telling us the government has not done the necessary measures to contained the growth of the debt. francis coppola, in rochester it is a shot across the bows. >> i think it is. i think the driver for this actually has been the debt of default -- threat of default caused by the debt ceiling. this is not the first time we have had threats of default, due to political infighting. the first day since the financial crisis, this is the third time. it is about time that somebody said this will not do, you cannot play chicken with the world's global system. >> we will talk about the specifics of the chinese angle during the program but how does beijing view what is going on in terms of the fitch downgrade?

>> i don't think it is particular to beijing. you have heard two commentators carefully spell it out, if it was not the u.s. it would be a ponzi scheme. since 2001 the u.s. has been exceedingly -- exceeding its income in terms of spending. if you had a salary of 100,000 you are spending more than 100,000. in addition to going into deficit on the yearly basis, since 2009 they borrowed additional money, that has increased the debt the u.s. is in a position where it is borrowing to pay its debt interest. that is interest on the money it has already borrowed. with no end in sight as we saw with kicking the can down the road, it is really about, there is no solution. it polarized everything that my fellow commentators have pointed out.

it is an obvious conclusion, what is only strange is that the other rating houses have not joined in. >> can i bring you back in here, what janet yellen is angry about is the fact that these sorts of downgrades happen to countries that are developing, or are third world, or isolated, or under certain regimes, her feelings have been hurt? her professionalism has been tainted with all of this, perhaps. >> secretary yellen has focused the discussion on the subject of economics. she is right to say the u.s. is still the most powerful country in the world. it's probably the most active place for investment money to come into the country. every country in the world is setting their savings to the u.s. because it is the most productive country in the world. fitch is telling us it is not the o's economy they are worried about, but the u.s. politics. they're not confident the government, that both democrats and republicans, they are not

confident that they will contain the growth of spending. it is mostly entitlement spending, the spending for social security, health care, which are the main drivers for the rise in spending that somehow, fitch is telling everyone, you know, u.s. government is not able to either raise taxes or contain spending in a way that makes us confident the u.s. government will be able to pay off its debt in the long run. >> while you were talking, eina withr was shaking his head -- was shaking his head. why were you shaking your head? >> well, i love this idea that somehow, you cut education, social welfare in a country which has 10.1% poverty already. people, droves of people, are in the streets. you have an economy which is putting a lot of people to default on their homes. meanwhile, the unlimited spending is going to the military. the largest military budget ever, the military was exempted

from any kind of decrease. you know, this idea that the u.s. is somehow doing the right thing here is kind of ridiculous. the u.s. has pursued a path of financial irresponsibility. i'm not saying that from beijing's interview. how else can you explain it? we have exceeded our gdp in terms of our national debt. we are second in the world behind japan, which is around 240 to 250, depending on which day you are measuring. that is to 40% above their gdp. so, we are in a verified era where our strength, we have strength, there is growth, but not the kind of growth, nor is there a solution to the stat. >> francis you heard both sides. you are nodding in agreement with william before. i will bring you in for a brief reply. >> yeah. i was nodding about politics. i do think this is a political issue.

the reason why the u.s. cannot get control of it spending and can't direct it into the most socially effective and productive areas either, is actually because of the dysfunctional politics. that is fundamentally the heart of the matter. it is the reason for the short-term view and the focus on things that potentially don't matter as much as, in pairing the next generation, educating them and doing something about demographics. the politics are so dysfunctional. >> you talk about the politics. let's go back to william. we're talking about a divided government. certainly divided, u.s. political stances. it comes to the debt ceiling. we've heard so much about it every time, when the republicans want to raise it or when the democrats want to raise it, heated debates, real worries about where government services will stop. this happened -- happens time and time again. the can't seem to find middle

ground. politics has gotten very personal. >> absolutely. in the u.s., politics has become so dysfunctional, as what was said, the u.s. is not able to decide on priorities. unfortunately, einar has a great narrative about the size of u.s. military spending being the source of the problem, but it is only 3% of gdp. military spending is scheduled to shrink as a share of gdp going forward. when the budget is taking care of the military spending, it is the social spending for health care. it is not so much the amount of spending, it the cost of health care, which the u.s. has never been able to get a handle on, going back to clinton and his attempts to modify and reform health care. for the u.s., it is a problem of cost going out of hand and the o's government not having the capability of making hard -- and

the u.s. government not having the capability of making hard decisions on health care. >> we need to -- neutrality. talk about the military. i don't want to get to log down about the military. but the fitch statement talked about governments over the last 20 years. we have two major military conflicts. what in iraq, and the other in afghanistan. the military spending on those two alone have gone into the billions. that is a debt that the american government has to pay back. they borrow money. this is exacerbating the problem we are seeing post endemic, -- pandemic and now the cost of living, which is affecting all americans and the public globally. >> we need to distinguish between two things. deficit and debt. the u.s. has high levels of historic debt. but because of the wars it has engaged in, in the last 20 years, and even before that. we should remember, even going back to the vietnam war, it has

left it with legacy of debts. the debt level is high anyway. on top of that, we have an entrenched deficit. every year, all the time, it's spending exceeds its revenues. and i think, from the way i read a statement, it was the entrenched deficit that is more concerning than the debt. >> let's move the conversation on. 2011, standards and poles downgraded in the u.s.. there was panic. thanks moved to usa, there has been no panic this time. there's been no major moves. everyone has got on with it. what's going on? at the end of the day is it china and japan, by most of america's debt -- buying most of america's debt. this whole scenario about the strength of the dollar? >> well, like the big four

accounting firms, there are the big three in terms of rating agencies. two have maintained their aaa ratings. it will not matter if, for any reason, one of the other rating agencies downgrades the u.s., then it starts to matter. because it is a signal. a lot of contracts require that at least two rating agencies rate a bond at a certain level. if somebody wants absolute safety they will say, we need to rating agencies, that say this is aaa bonds. then there are contracts, people say, well i cannot buy those, i need to buy something else, so, it will make sense. i want to add an interesting note. two weeks after s&p lowered the rating, they were investigated for fraud. the following year in 2012, a group named evans, a smaller rating house, dd the same thing. they downgraded twice.

they were probably investigated by the fbi or some sort of fraud theory. they settled in the end. it was not a happy circumstance. i wonder if fitch is going to be punished. i disagree with this idea that the treasury secretary yellen, who is somebody who follows the data. she is just putting on a show. she has to be worried about these yearly deficits. as my colleague is pointed out, it is entrenched. it does not change. on top of that, more borrowing for wars and pandemics. >> indeed. let's go back to you on the whole debate. we talk about the politics. president biden has inferred that he thinks the debt ceiling should go, it perhaps negates the constitution. this may be a debate that will either head towards presidential election or maybe resolve when

the next president is elected. you need a bipartisan approach on these things. can we expect more bickering and more instability? countries like china are watching, are today? -- aren't they? >> they are. we have not seen the last of the debt ceiling, whether there should even be a debt ceiling. whether congress should be able to authorize spending to pay for it. it all seems -- even where i sit from the u.k., it is embarrassing. it doesn't look like any way to run a country. the big buyers of american debt will be looking at this and saying, we want to trust the american savings products that we buy. u.s. treasuries, nbs, what have you, we want to trust the dollar. yet, their stuff going on in america, which undermines faith in those things. how long are they going to put up with that? >> how long will they put up with it? one of the things that many big

businesses, certainly in the u.s. will be wondering, is whether we are seen as reliable. obviously, big companies have to take on debt. they have to borrow. how is this going to affect the big multinationals? the big computer firms, the airline industry, the construction firms? >> well, one consequence of the rating decision, it really has been acknowledged of what we have seen, that the u.s. governance structure is the ability to contain spending is in question. the u.s. treasuries one now have to pay higher interest rates to compensate. what will happen is for u.s. companies, it will be harder for them to raise money, harder to finance investments, that is a consequence of this poor governance structure in which they operate. that is something that most companies have learned to live with and acknowledge that there will be a higher cost. for those that are holders of u.s. treasuries, they will be

contrary -- compensated with higher interest payments. the market will work itself out in terms of repricing u.s. treasuries, that makes people confident and hold that as a source of savings. >> in terms of -- trying to understand the markets, let's see what you want to say? >> i'm sorry, i completely disagree with my colleague. first off, it's not about containing spending. it is about inflation. that is what the -- why the fed has been increasing rates. as they have increased rates, people who bought before then, they have seen the value of the treasuries, they bought plummet. that is why we have had issues like silicon valley bank going under, as well as others. i don't even know where you're coming up with this idea that this is somehow about the possibility of curtailing social spending as the problem. the problem is the u.s. is less competitive. if you look at inflation, in terms of wages and where it is

going, you will know that services within the u.s., hospital, education, have soared, literally gone up, 10, 12 times, whereas actual goods coming from the rest of the world have remained fairly steady. in some cases, have gone down. the inflation that the u.s. is facing, is of its own making. it's a highly service economy, when those wages go up, it's not like putting the interest rates higher by the fed is going to make people feel less sick or like they don't need an education. >> i will come back. you are shaking your head through all of that. >> yes, absolutely. that's -- inflation is a global problem that resulted in the supply problems caused by covid in the war between russia and ukraine. we see that before covid, the u.s., for 10 years, had inflation rates of less than 2%. the global economy has been in a disinflation period.

the fact that inflation is brought up is not relevant. what is relevant is that the u.s. treasury has not been able to sell its bonds at a low interest rate because the markets are slowly losing confidence that they will be able to get back the same value that they put in. i think this is a long-term problem that has to do with the size of the deficit and being able to contain the size of the deficit is the main issue, which janet yellen, and every other treasury secretary has talked about, the u.s. is on a nonsustainable physical trajectory. we need to contain the size of the deficit, both spending and by raising taxes. >> i can see you will not agree on that. let's get back to francis. it was only this week that was so the bank of england raise its base interest rate. i'm wondering from your position in the u.k., how the bank of england watches what is going on in america, understands that the spending issues, the debt

ceiling and why the treasury is so angry at the fitch rating. how does raising bank rates in the u.k. and dealing with inflation relate to what is going on in the u.s.? every countries trying to deal with inflation at the moment, globally. >> absolutely. inflation is a global problem. inflation in my country is worse than in the u.s. at the moment. i don't think it is directly related to the size of the fiscal deficit. we have a sizable one at the moment because of the covid pandemic. we had all of that in the aftermath of the financial crisis, everyone was terribly right about fiscal deficits and debts, everything was going to go terribly wrong. it didn't. i'm wary about raising those and again, because i think some of the policies followed at that time were incredibly damaging. what i would rather focus on is

looking at this from a global perspective, to see what the drivers of the american deficit are. one of the things i noticed, and it has been written by some people, is that the u.s. kind of acts as a consumer of the last result for the whole world. if you have a whole world were lots of countries are trying to follow export led growth strategies and build up foreign-exchange reserves, someone has to run a deficit, the imf has commented on this, over the last few years, those countries have been the u.s. and the u.k. i don't think it is any accident that those are the countries that have the biggest problems with inflation. >> can i come back to you. china has been pushing over, several years, to push the alternative to the dollar. it's made no secret in that respect. but it has backed off recently.

what is going on? is it because the dollars to established and strong, and globally recognized as a reliable f und -- f und and to invest in? why i sth -- why is there no faith in the won? >> i think you're mischaracterizing. i don't think they lacked faith in it. they've been putting together digital currency. they have been playing that out, doing it very slowly. they want to make sure it works. they are also doing currency swaps, with a lot of the nations that they are doing business with. remember china has over 100, almost 120 nations where it is the primary trade contributor. but, i don't understand where my colleagues are coming from. i would really like them to tell what they said to the man on the

street in the u.s., people have lost 4% of the real income due to inflation. europe, even more. great britain as well. saying that inflation somehow doesn't matter, i find that a highly strange -- highly strange given the u.s. is focused on that, that it is raising rates and forcing other countries to do the same. in terms of china, it is not letting off, but this is a time of great uncertainty. this is not the time to push forward. there's obviously, coming up the bricks meeting, coming up in the near future. they will be looking at a bricks currency. i don't know how far that is going to go. but it is not about replacing the dollar. the u.s. violated the terms of its own agreement, not to weaponize swift. that is a system that settles a -- bank accounts on a daily basis. everything you can swear out has to be secure, because you have so many transactions. the u.s. said they would never do that, they would never weaponize it, and then they did.

routinely using it as a weapon against any country who does not view us following its criteria, that includes a lot of country right -- countries right now. at this juncture, you have a situation where china is trying to be an adult in the room. the u.s., as my colleagues have pointed out, does not have its house in order. >> it certainly seems to be like that. we're getting to the end of the program. really, if we move this on, come to huge general elections in the u.k. and in the u.s.. can i come to you first? international relations, the special relationship between the united kingdom and america is one of those things that can never be broken. yet, both administrations don't always see i die but when it comes to finances and inflations, are they working together?

how do you assess the way that they are trying to conduct a deal with inflation and the problems of the general public has at large? some of them are losing their homes. >> i think both countries are puddling -- paddling on canoes. the american fed is trying to get inflation under control its way. unemployment is doing well on that. it is not going to be concerned about what it -- is going on in other countries. it will only take guidance of foreign leaders, to the extent that the british economy is affected by global forces, particularly by the strength of the dollar and the cost of energy, which is priced in dollars. it's not whether the u.s. leads and the u.k. follows, and it is often -- as it is often portrayed, it is more so that it

is more -- there is more sufficient dependents. >> one final comment, william from you. is this going to be a huge issue as we lead towards the presidential election? >> absolutely. the u.s. remains the most powerful country in the world. that is why it's currency is being used for every transaction on the world. the u.s. government and politics going forward is going to have to ensure that the u.s. position is and continues to be the most powerful country and people remain confident that the u.s. dollar can be used. >> we will see what happens. i has been great to speak to all three of yout. william lee, taihe institute and francis coppola. thank you for watching. you can see the program anytime by visiting our website at al jazeera.com. go to our facebook page. you can also join the conversation on twitter.

our handle is@ajinsidestory. thanks for your time and your company. ♪

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