After the failure of rating agencies to rate securities properly as to risk preceding the subprime meltdown (bundled securities rated AAA with near worthless underlying loans), don't know what to make of S&P's downgrade of U.S. debt from AAA to AA+ Friday evening.
Is it a beginning? Read on.:
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 challenge," the company said in a statement.
It appears that the American public did some of their own analysis, underscored this week by the headline, "Disapproval Rate for Congress at Record 82 Percent After Debt Talks."
The AA+ rating, by definition, still implies good credit-worthiness. Moody's and Fitch still hold U.S. debt as AAA.
Regardless, with a new 16 trillion "credit card" limit, fiscal challenges remain.
Here's why. Simply put, the bigger the debt, the bigger the interest rate risk exposure to service the debt. The U.S. debt downgrade potentially has higher borrowing cost implications for consumers, businesses and the U.S. government, which impacts economic growth. It remains to be seen how the markets will adjust to the S&P downgrade, whether a shift upwards in rates in the Treasury yield curve occurs -- whether our creditors will demand higher rates.
For now, matters "across the pond" in the eurozone appear worse. European money markets seized up this week, with Italy and Spain in sharp focus. The ECB announced intentions to buy back debt of Italy and Spain. This, after the European Union has already bailed out Greece, Ireland and Portugal.
Seems to me sovereign debt default issues will be with us for some time, based on the absolute levels of debt relative to GDPs within developed nations and the question of how to now grow the economies going forward to sustain the debt and meet obligations. Some astute investors note that there are two ways to default on debt -- an actual default or through devaluation of the currency. It's no secret to any of us, that the dollar has suffered devaluation in the last decade. Just this last Thursday, the Swiss Franc hit another high against the dollar (another marker for the week).
If we keep raising the debt ceiling (to avoid actual default), then we're monetizing debt (financing government spending) to meet our obligations. Unless, of course, we can grow the economy to keep up with the pace of deficit spending. But, here's the deal.
This week's debt ceiling increase (which may turn out to be yet another temporary fix) came in at 2.1-2.4 trillion to a jaw-dropping 16 trillion. We've raised U.S. debt ceilings before. What makes this one uncomfortable is that it puts the U.S. that much closer to the 100 percent threshold of debt to GDP, and that's a drag on the economy. Historically, this "shaves about one percentage point off GDP, which was just 1.3 percent for the second quarter and 0.4 percents for the first quarter."
With the weight of big debt, the "heavy lifting" to grow the economy, to create jobs, becomes all the more arduous.
As if back-to-back days of U.S. stock market declines weren't enough this week (culminating in a 500 point Dow plunge on Thursday), the jobs picture remains murky. This week, the unemployment rate showed a slight improvement to 9.1 percent from 9.2 percent. But, if one looks beyond to the increase -- in the discouraged no longer searching -- the unemployment picture looks dismal.
What's this all saying?
We can't expect quick fixes to problems formed over decades. Tempting as they may be, within an age of instantaneity. I keep coming back to structural changes needed.
Note that the financial crisis (and the most recent explosion in debt it created) came on the heels of already multi-decade long trends that chiseled away at jobs -- conglomeration, globalization and technological automation. Running an economy, in part, on financial bubbles, particularly in the last decade, masked the underlying reality of the job market.
Yes, we need growth and jobs. How do we do this within the economy we've created over decades? Where on the horizon is the sustainable revenue bedrock, the growth that will move us forward?
Amidst the brouhaha, the numbers, let's not forget the very human.
Is there a point at which debt and debt service crowds out life and living?
Or, is life about growing and working to achieve happiness, fulfillment and harmony as a society?
Jeff Madrick: S&P Downgrade Brought On by Republican Obstructionism
Robert Kuttner: Triple-A Idiots
Jeff Reeves: Don't Panic: The U.S. Credit Downgrade Changes Nothing
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World News 8/05: U.S. Credit Rating Downgrade? Full Episode ...
The choice of D. Borrow More Money is never an option because its just plain stupid. The obvious
question from the 800 pound gorilla in the room is: How are you going to pay back a loan when you already can't pay back what you owe now?
Is there an alternate universe somewhere where this logic does not apply? Apparently so.
There is so much waste in government spending that if the federal government was ever truly audited objectively like a company, a lot of people would get fired, that is of course if the company management wasn't benefiting from the waste.
As far as taxes are concerned, closing the tax avoidance loopholes would generate substantial income for the government from multi-million dollar corporations and individuals, unless of course the lawmakers with the power to do so are benefiting financially from keeping those loopholes in place.
By the way, where's my bailout? (... just a random thought)
But in the end, the same premise would always hold true... imperfect humans cannot successfully govern themselves. If you disagree then show me the society that does.
If we were flies on the wall you would really find out the real reason for this nastiness and discord.
A generation of job loss compensated for by increasing consumer debt got us here frosted by predatory lending and selling toxic mortgage securities to pension funds and other suckers.
While more efficient technology contributes to job loss, trade agreements have been a huge contributor to the problem. In the thousands of S&P downgrade comments, I didn't see many indicting trade agreements. I saw hardly any indictments of the creeping regulatory spiderweb that discourages small business, especially the innovations that begin in people's homes and garages. (Remember, Bill Gates started in a garage and said the regulatory climate now discourages innovative start-ups.)
Proliferation of all these little rules and confusions is less likely to damage large businesses because they have efficiencies of scale and can always offshore. With spiderweb regulations and MERS bankster initiative to destroy the land title system in the US, I fear we are becoming more third world. Here's Hernando de Soto's take on why Egypt's not fostering small business leads to unrest. It isn't about democracy per se, but democratic financial equal opportunity.
http://online.wsj.com/article/SB10001424052748704358704576118683913032882.html
Previous blogs address your points about debt and how we got to where we did.
Yes, globalization (trade agreements included) have been a "huge contributor" to job loss.
Yes, misdirected regulation is an issue for small business as is now the inefficient flow of capital within the economy. Resources have largely gone to stem the fallout of the crisis and to keep the banking system afloat.
Then I think about all the AAA ratings they gave to mortgage-backed securities. What was the per cent of securities rated AAA that actually WERE AAA? Did it exceed single digits? Weren't the vast majority that S&P rated AAA mortgage-backed bonds actually junk bonds?
Tell me again why S&P's ratings (and/or Moody's and/or Fitch's) should be trusted?
If someone changes the reference maps, we'll be increasingly lost.
Many seems to have that gut feeling.
If Obama had simply vetoed the Bush tax cut extensions....
We would not have needed the debt ceiling increase.....
If Obama had used the previously used 14th amendment option to immediately raise the debt ceiling...
Our credit rating would still be AAA.
If Obama would simply use the 3 day gaps in the GOP occupation of the Washington, for the recess appointment's, Elizabeth Warren would already be nipping at the heels of the banksters.
All of Obama's buds are DLC Reagnomics loving conservatives. What did you expect?
Vote for the CPC Progressive caucus folks in the primaries and the dems in the general.
Ideally, The CPC would leave the corrupt Dems, and grow Dean's Vermont Progressive Party into a national party to give us a real liberal/progressive choice.
Our leaders do not always live up to our hopes.
Ummm, when was the 14th Amendment previously used?
"If Obama would simply use the 3 day gaps in the GOP occupation of the WashingtonÂ, for the recess appointmenÂt's" [several sics in that comment]
If you go by the Constitution, both chambers of Congress must agree to any recess of either chamber (see the final paragraph of Article I, Section 5). The House won't agree to the Senate going into recess, so the Senate is doing pro-forma sessions every three days (or so).
http://caselaw.lp.findlaw.com/scripts/getcase.pl?navby=case&court=us&vol=294&invol=330#354
Obama can bypass the tea pots in Congress.
I totally agree with this statement! I can just say I am very disappointed with our president. The fact he and congress totally ignored the presidents own bipartisan budget comity is appalling!
It is true the comity's report had some recommendations for cuts law makers did not want to here, but why bother forming a comity in the first place if you plan to ignore their findings? So, the blame lies on all the politicians that ignored this comity's recommendations!
Europe/euro? Unlikely as their fiscal problems are as bad as ours, but their financial union is incomplete.
Communist China? Unlikely. Does anyone believe that their government is as or more transparent than America's? Probably not. Believing their stats is a fools game; don't even get me started on their empty cities.
Gold? There isn't enough gold in the world to shift investments.
The government has no choice but to inflate our way out of debt. That's the way its always been done, and that's the way it will be done now.
Perhaps the worldwide financial system will collapse. All debts will be wiped clean. While that situation will be extremely painful, America will recover quicker than the rest. For all our dysfunction, no country matches the power of our founding papers/principles withe the geographic ability to project power across both great oceans.
The troubles that Europe are currently experiencing due to the amounts of debt that has accumulated only underscore the need for us to change our spending trajectory.