No Deficit Reduction and the Credit Rating Agencies don’t Care

Posted by PITHOCRATES - August 3rd, 2011

The Credit Rating Agencies wanted Serious Spending Cuts and our Glorious Government Delivered 

It was scary.  We stared into the abyss.  We stood at the edge of the world as we knew it.  With one foot held up midstride, dangling precariously over the void.  Ready to tumble forward into the chasm of fiscal demise.  And then something happened.  Congress compromised.  There would be more debt.  There would be more spending.  And they restored our financial house to order.  We could put that foot down on terra firma.  Everything was going to be all right.  Like it was before.  Hallelujah (see U.S. Debt Rating: Economists Wait to Hear From S&P by Susanna Kim posted 8/3/2011 on ABC News).

Now that President Obama has signed the debt ceiling deal and averted a default, economists are waiting to see if ratings agency Standard and Poor’s will downgrade the nation’s credit rating…

At stake in all this is not only interest rates the US must pay on its $14.4 trillion debt, but a host of rates for consumers, from mortgages to car loans to credit cards. A downgrade of US debt would cause interest rates of all kinds to edge up and that would cost the US and consumers billions of dollars. The stock market plunged yesterday partly on worries about this possibility.

What a horrible fate this would have been.  God bless Barak Obama, Harry Reid, John Boehner and everyone else that did such an extraordinary job of saving us from this fate.  The credit rating agencies wanted to see some serious spending cuts.  And by God if that isn’t what our glorious government gave them.  Moody’s and Fitch have already given us the good news.  We’re still AAA with them.  Just waiting on Standard and Poor’s.  If they still like us we’re golden.

No spending cuts, no Deficit Reduction and no Credit Downgrade, were they Lying?

The only problem with this is that it is all bull [deleted expletive] (see Spending Cuts Seen as Step, Not as Cure by Binyamin Appelbaum posted 8/2/2011 on The New York Times).

There is something you should know about the deal to cut federal spending that President Obama signed into law on Tuesday: It does not actually reduce federal spending.

By the end of the 10-year deal, the federal debt would be much larger than it is today.

Indeed, both the government and its debts will continue to grow faster than the American economy, primarily because the new law does not address federal spending on health care.

Well how can this be?  More spending?!?  And not just a little but a lot.  So much that it will grow faster than the economy.  But they told us they made real spending cuts.  That they made some real deficit reduction.  Are you telling me that our government lied to us?

Stabilizing that [debt] ratio would require about $4 trillion in cuts over the next decade, according to a number of independent analysts. That is also the target that S.&P. declared the nation must meet, and it was the goal of the “grand bargain” that Mr. Obama tried to reach last month with Speaker John A. Boehner.

The deal they reached instead contains cuts of at least $2.1 trillion over the next 10 years. By the end of that period, the federal debt could equal as much as 80 percent of economic activity, and rising.

Guess so.  We barely made half of the recommended cuts and two of the agencies already gave us their blessings.  Which begs the question was all that fear mongering of the debt downgrade just bull you-know-what?  Just a trick to raise the debt ceiling?  I mean, this deal should have triggered the credit downgrade.  It doesn’t cut spending or reduce the deficit.  So how can it be the end of the world as we know it one minute and then credit rating bliss the next?  Because nothing changed.  Something fishy here.

With the Spending Crisis over, now comes More Spending

All right, so the spending cuts were only phantom spending cuts.  Just designed to fool the American people so the government can do what they do best.  What they always planned to do.  Even though the credit rating agencies said we can’t keep doing it.  Spend with reckless abandon (see Compromise achieved, reform’s the next chapter by Timothy Geithner posted 8/2/2011 on The Washington Post).

The agreement creates room for the private sector to continue to grow, without the threat of default and the burden of higher interest rates…

And by locking in long-term savings, Congress will have more room in the fall to pass additional short-term measures to strengthen the economy — such as extending the payroll tax cut, which provides an average of a thousand dollars to the after-tax incomes of working Americans; extending unemployment benefits; and financing infrastructure investments. After all, strengthening growth and putting more Americans back to work are among the most important things we can do to improve our fiscal situation today and over the long term.

This is like a chain smoker who just got the scare of his life.  A bad lung X-ray that could be cancer.  Only to find out later that it wasn’t cancer.  He feels so good that he lights up to celebrate his good health.

The government has already tried every Keynesian stimulus in the book.  A trillion dollar stimulus bill.  Subsidies for green energy (the economy of the future).  Tax credits.  Shovel ready jobs.  None of this helped the economy.  It just gave us a spending crisis that added so much debt that the credit agencies are threatening to downgrade the U.S. bond rating.  Additional spending is not going to improve our credit worthiness.  In fact, it will do that other thing.  The opposite thing.  It will make it much, much worse.  How can they not see this?  Was I the only one paying attention these past weeks?

When the Market Corrects things get Better; when the Government Corrects you get Double-Dip Recession

So it’s been all smoke and mirrors.  So what?  So they like to spend.  But their spending stimulates, does it not?  They’re investing in the future.  To win the future.  Like green energy.  The economy of the future.  They’re pouring money into this to create jobs and stimulate the economy.  And imagine how bad things would be if they didn’t do this.  Instead of a double-dip recession we may be in a triple-dip recession.  The recession could be one dip worse, then, couldn’t it?

Yeah, that’s a joke.  The economy is horrible despite everything they’ve tried.  Or perhaps it’s horrible because of everything they’ve tried.  Spending for the sake of spending hasn’t produced any results yet.  Just take a look at the Chevy Volt.  The car that was to lead GM back from the abyss.  And change the American automobile industry.  The Obama administration was going all in on this car.  Even ponying up $7,500 in tax credits per car just to make people buy these things.  But apparently the people don’t like the Chevy Volt.  Because they’re not buying them.  Even with a federal gift of $7,500 to sweeten the deal (see Chevy Volt: Still Not Selling by Jonathan V. Last posted 8/3/2011 on the weekly Standard).

The July sales numbers are out and the Chevy Volt continues to electrify (get it?) the country. GM sold … 125 Volts last month!

Way back in March I made fun of the Volt for selling 281 units in February. Turns out, February was a good month. But wait, there’s more! GM says they’re going to increase production to 5,000 Volts per month in order to keep up with demand. You see, they claim that the reason the Volt isn’t selling is that they can’t keep enough cars on the lot. A GM spokeswoman recently claimed that they are “virtually sold out.” Which is virtually true. Mark Modica called around his local Chevy dealers and found plenty of Volts waiting for an environmentally conscious driver to bring them home.

These numbers are so bad they’re embarrassing.  And building 5,000 units to meet a 125 unit demand?  You can tell the government is calling the shots at GM.

This is what happens when government starts running automobile companies.  They destroy automobile companies.  And wastes tax money.  They’ll keep raising taxes (and borrowing money) so they can ‘invest’ in jobs.  Creating jobs where people build things that nobody buys.  This is how the best and brightest tweak the economy.  Use Keynesian stimulus to correct for ‘market inefficiencies’.  Which in Washington is when people don’t spend their money ‘correctly’.

Of course, when the market corrects things get better.  When the government corrects you get a double-dip recession.

The Obama Administration did some serious Fear Peddling to get the Debt Ceiling Raised

The Obama administration did some serious fear peddling to get the debt ceiling raised.  First they tried to scare everyone that the government would default on their debt obligations.  When it was pointed out that there was some $200 billion of tax revenue coming in monthly they changed their story. 

Then they tried to scare old people by saying they couldn’t send out Social Security checks.  When it was pointed out that Social Security Trust Fund was full of treasury securities (i.e., IOUs) that could be converted into cash without any impact on the debt ceiling they changed their story. 

Then they tried to scare everyone that if they didn’t reduce the deficit with a balanced approach (new taxes and spending cuts, but mostly new taxes) the credit rating agencies would downgrade the U.S. AAA debt rating.  So far that hasn’t happened.  Despite there being no deficit reduction.

Well, they got their debt increase.  They may have been less than honest but they got it.  And what are they going to do with that additional $2.4 trillion?  Why, build more Chevy Volts, I guess.  And other winning-the-future job-creating Keynesian stimulus spending.  Because it’s worked so well these past few years.

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The Republicans and the Credit Rating Agencies believe it’s a Debt Crisis, not a Revenue Problem

Posted by PITHOCRATES - July 23rd, 2011

The Crisis of the Debt Crisis Negotiations

It’s near crunch time.  When something has to happen.  Something.  Good.  Or bad.  But the politicians aren’t playing nice.  And the pundits are opining (see Reactions to the impasse posted 7/23/2011 on First Read).

Andrew Sullivan: Republicans are anarchists.

David Frum: The Republicans made the debt problem a debt crisis.

Jay Cost: Obama is a lot like Jimmy Carter.

Ezra Klein: John Boehner is purposely wasting time by making non-offers.

Over on the New York Times, Paul Krugman is calling it Naked Blackmail (posted 7/23/2011). 

It turns out that in the final stages of the debt negotiations, Republicans suddenly added a new demand — a trigger that would end up eliminating the individual mandate in health care reform.

…the health care mandate has nothing to do with debt and deficits. So this is naked blackmail: the GOP is trying to use the threat of financial catastrophe to impose its policy vision, even in areas that have nothing to do with the issue at hand, a vision that it lacks the votes to enact through normal legislation.

Which is one side of the story why Boehner walked out of the negotiations.  For another side you can read Why the Obama-Boehner talks fell apart by Keith Hennessey (posted 7/23/2011).

The President backtracked in private negotiations this week, demanding bigger tax increases after the Gang of Six, including three conservative Republican Senators, released a plan that raised taxes more than the President had previously demanded…

…the President retreated from an earlier position on taxes as a result of the Gang of Six introducing their plan. On total tax revenues, tax rates, and refundable outlays, the President increased his demands last week.

And then there’s the unfunded mandate.

…the President and the Speaker had open disputes about how much to save from Medicaid, and about an automatic mechanism to force Congress to act on the entitlement and tax provisions. The President wanted a provision that would “decouple” tax rates if Congress failed to act, allowing top tax rates to increase while extending the other tax rates. Republicans would hate this outcome and would therefore have an incentive to legislate the deal. The Speaker insisted that if this automatic hammer decoupled tax rates, it also had to repeal the individual mandate from the Affordable Care Act (ObamaCare), to create roughly equal legislative pressure on both sides of the aisle.

So there’s a lot more to the story some people are leaving out in their condemnation of Speaker Boehner and the Republicans.  For it would appear that it’s Obama and the Democrats who are refusing to make a deal that cuts spending or doesn’t raise taxes.  And it’s Obama that’s been increasing his demands.  With an able assist from the Gang of Six.

The Debt Rating Agencies siding with Boehner and the Republicans

But are Boehner and the Republicans just partisan mad men?  Making mountains out of molehills?  Debt crises out of debt problems?  Guess it depends on who you talk to.  If you talk to partisans on the left, yes.  If you talk to credit rating agencies, no (see Egan Jones cuts US rating, cites high debt load by Karen Brettell posted 7/18/2011 on Reuters).

Credit rating agency Egan-Jones has cut the United States’ top credit ranking, citing concerns over the country’s high debt load and the difficulty the government faces in significantly reducing spending.

…the cut is due the U.S. debt load standing at more than 100 percent of its gross domestic product. This compares with Canada, for example, which has a debt-to-GDP ratio of 35 percent, Egan-Jones said in a report sent on Saturday.

And S&P is getting closer to following suit (see Obama officials clash with S&P over downgrade threats by Tim Reid and Rachelle Younglai, Reuters, posted 7/23/2011 on Yahoo! News).

Since October, S&P has accelerated its deadline three times for when it might downgrade the United States’ coveted AAA credit rating as efforts in Washington to reach a deal on cutting long-term deficits have faltered.

The U.S. is in very dangerous debt territory.  Even Al Jazeera is writing about the severity of this debt problem (see Obama launches crisis talks over US debt posted 7/23/2011).

The US government now owes $14.3tn, which is its current legal limit, and is more than the size of the economies of China, Japan and Germany put together…

The largest US creditor, China, has twice warned that the US must protect investor interests, as ratings agencies Moody’s and Standard & Poor’s have said the sterling Triple-A US debt rating was in danger of a downgrade.

You know your debt is bad when it exceeds the sum of three of the largest economies in the world.  At least you should know.  That’s why the rating agencies are looking at downgrading American sovereign debt.  The debt problem is that bad.  And tax hikes without spending cuts will only make this very bad problem much, much worse.  Because it’s a debt problem.  Not a revenue problem.

And, yes, the high costs of Obamacare need to be included in this conversation.  Because it is a BIG part of the spending problem.

From Sea to Shining Sea, at Least for awhile Yet

Raising the debt ceiling is not the problem here.  It’s the amount of debt that’s the problem.  Whatever happens in the next few weeks the United States will survive.  But it will not be able to survive the long term explosion of spending (in particular on health care) and debt.  Which is the thing that is making the rating agencies nervous.  As well as the rest of the world.

In the grand scheme of things, it would appear that Boehner and the Republicans are trying to do the right thing.  Whereas Obama and the Democrats are merely looking for short-term political gain.  Which is not in the best interests of the country.  But they’re not worried.  For whatever becomes of America, they are certain that they will be ensconced in their liberal Democrat city-states.  Insulated from the surrounding ruins that they will simply refer to as flyover country.

So much for “from sea to shining sea.”

www.PITHOCRATES.com

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