After the Fed says they will Print More Money (QE3) Egan-Jones downgrades U.S. Sovereign Debt

Posted by PITHOCRATES - September 16th, 2012

Week in Review

Back when the Congress and the White House were battling it out to raise the debt limit the final compromise to raise the limit caused Standard and Poor’s to lower the U.S. sovereign debt rating for the first time in history.  The Left blamed the Republicans for refusing to raise taxes.  As if the excessive spending had nothing to do with it.  Well, another credit agency is downgrading the U.S. sovereign debt rating.  And this happened after the Fed announced QE3.  And nothing else (see Egan-Jones downgrades U.S. rating on QE3 move by Wallace Witkowski posted 9/14/2012 on Market Watch).

Egan-Jones Ratings Co. said Friday it downgraded its U.S. sovereign rating to AA- from AA on concerns that the Fed’s new round of quantitative easing, or QE3, will hurt the U.S. economy. The ratings agency said the Fed’s plan of buying $40 billion in mortgage-backed securities a month and keeping interest rates near zero does little to raise GDP, reduces the value of the dollar, and raises the price of commodities.

QE3 is Keynesian stimulus.  Printing money.  Which according to Egan-Jones won’t help the economy.  Apparently the people at Egan-Jones aren’t Keynesians.  Like in the Obama administration.  And at the Fed.  QE3 will devalue the dollar and raise prices.  While it may cause some short-term stimulus it will only make things worse in the long run.  Because of that inflation.  And it doesn’t address the real drag on the economy.  The anti-business policies of the Obama administration.  The biggest one being Obamacare.  With Taxmageddon right up there with it.  It’s the high taxes and costly regulatory policies that are holding back economic growth.  And devaluing the dollar doesn’t help these problems.  It only compounds them.  By raising prices.

QE3 will take a bad economy and make it worse.  Making the recession longer.  And the eventual recovery more painful.  Just like every recovery after a long period of inflation.  Just like after the Seventies.  Just like after the Nineties after the dot-com bubble burst.  Just like now after the subprime mortgage crisis.  There is a pattern here.  Easy money leads to irrational exuberance.  (Reckless spending encouraged by cheap money.)  And very unpleasant recoveries.  We got out of the early Eighties recession by cutting taxes.  Not with inflationary monetary policies.  We got out of the early 2000s recession by cutting taxes.  Along with some inflationary monetary policy.  The recovery wasn’t as long lasting as it was following the Eighties.  Now they are only proposing inflationary monetary policy without any tax cuts.  Which is why the Great Recession lingers still.  Proving tax cuts stimulate.  Not inflationary monetary policy.

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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.”

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