India’s Keynesian Policies may cause S&P to downgrade their Credit Rating

Posted by PITHOCRATES - October 13th, 2012

Week in Review

Monetary policy can be confusing.  Especially when the Keynesians start talking about it.  Bunch of policy wonks.  Pushing a defective ideology.  For it doesn’t do anything they say it will do.  Excessive government spending, and deficit spending, rarely ends well.  It only leads to larger debts, weaker growth and price inflation.  Wherever Keynesians try their policies (see Significant chance of cutting India rating in future: S&P by Neha Dasgupta and Swati Bhat posted 10/10/2012 on Reuters).

India still faced a one-in-three chance of a over the next 24 months, Standard & Poor’s said, although a series of reform steps launched in September had slightly improved the country’s prospects…

“Weaker-than-expected tax receipts, owing to weaker economic growth, and higher-than-budgeted subsidies are the main reasons behind it,” S&P said, referring to its deficit outlook.

The high deficit is counteracting the central bank’s efforts to control demand-driven price pressures, while the government’s use of domestic savings to finance the deficit is crowding out private investment and lowering growth prospects.

Governments tend to increase their spending during good economic times.  Because they can.  The problem is that good economic times don’t always last.  And when the economy tanks so do tax receipts.  Leaving the government with spending obligations that they no longer can afford to pay.  So they borrow more.  Run larger deficits.  And expand the money supply by lowering interest rates.  Which leads to, of course, price inflation.  And, finally, that oft asked question.  Is debt really anything to worry about when we owe money to ourselves?  Yes.  For when the government sells bonds to finance deficit spending it pulls investment capital from the private sector.  Where business owners could have used it to create economic activity.  And jobs.

So never be fooled by Keynesians and their rosy projections of economic growth.  For their policies hinder economic growth.  And cause credit downgrades.  Everywhere they’re tried.

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Fitch follows S&P and Downgrades Eurozone Countries which doesn’t Help the Eurozone Debt Crisis

Posted by PITHOCRATES - January 29th, 2012

Week in Review

First Standard & Poor’s.  Now Fitch.  Things are not looking up for the Eurozone (see Greek debt deal hit by eurozone ratings downgrades by Angela Monaghan posted 1/28/2012 on The Telegraph).

Following similar action from rival Standard & Poor’s (S&P) earlier this month, Fitch downgraded Italy, Spain and Slovenia by two notches and Belgium and Cyprus by one notch. Fitch took no action on France’s AAA credit rating despite S&P downgrading the country two weeks ago.

The rating agency warned that the eurozone crisis would only be resolved “as and when there is broad economic recovery” and with “greater fiscal integration”.

It was also being reported last night that the German government wants Greece to hand over control of tax and spending decisions to a ‘budget commissioner’ appointed by the rest of the eurozone, before the country gets its second bail-out.

The budget commissioner would have to power to veto decisions made by the Greek government, according to a proposal seen by the Financial Times, marking a significant step-up in the EU’s powers over the sovereign governments of member states…

Eurozone finance ministers said that while there were still considerable challenges ahead, they believed in the future of a united eurozone.

They’re still trying to save the Eurozone because they can’t save the Eurozone.  Greater fiscal integration?  Hand over tax and spending decisions?  Having a veto over other sovereign nations?  It sounds like to save the Eurozone will require some erasing.  Of the borders between these sovereign states.  Something that sovereign states don’t like.  Being conquered.  Only with Euros and debt.  Instead of artillery and bullets.  Or sword and lance.

So to save Greece all the Greek people have to agree to is to become a vassal of the greater power.  Sort of a step back in time.  To the days of feudalism.  Where the poorer states serve their lord.  Who serves their sovereign.  The new Eurozone structure.  Whatever that may be.  Where the stronger member states will be among the nobility and have greater privileges than the poorer states.  Who will be among the serfs.  Grateful for the generosity of their masters.  And showing due gratitude and obedience.

It’s a simple plan.  But knowing the history of Europe one that is not likely to work.  Not in an age when the trend is towards independence.  Not subjugation.  Hell, even Scotland is talking about their independence from the United Kingdom.  So to think the Greeks are just going to surrender their sovereignty is wishful thinking.  Not in the land where Western Civilization was born.  Not in the country that contains the once great city-state of Athens.  That inspired Alexander the Great.  And the Romans.  No.  That’s just a wee bit too much history for the Greeks to surrender.

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The European Union retains its AAA rating from S&P for now but Member EU States can Change That

Posted by PITHOCRATES - January 21st, 2012

Week in Review

Things may be bad for some individual members of the European Union (EU) but the EU as a whole is doing all right according to S&P (see S&P Affirms The European Union’s AAA Rating, Outlook Negative by Sam Ro posted 1/20/2012 on Business Insider).

S&P just affirmed the European Union’s AAA rating.  However, the outlook is negative.

This comes a week after S&P downgraded nine eurozone countries, including France and Austria.

And directly from the S&P press release.

The outlook is negative, in part reflecting the negative outlooks on 16 of the 27 member states of the EU…

During 2011, eurozone member states accounted for 62% of the EU’s total budgeted revenues; budgeted revenues from Germany and France were 30% of total EU revenues, at 16% and 14%, respectively. On Jan. 13, 2012, we lowered the ‘AAA’ long-term sovereign credit rating on France and Austria by one notch to ‘AA+’, and affirmed the long-term rating on Germany at ‘AAA’. As a consequence of the Jan. 13 downgrades, the pool of ‘AAA’ member states contributing to the EU’s revenues has declined to 33% of 2011 budgeted revenues, from 49%. Nevertheless, in our opinion, the supranational entity known as the EU benefits from multiple layers of debt-service protection sufficient to offset the current deterioration we see in member states’ creditworthiness. We are therefore affirming the long- and short-term issuer credit ratings on the EU at ‘AAA/A-1+’.

So everything is hunky-dory.  As long as France and Germany don’t go broke trying to bail out the Euro.  And with the Greek problem about to be resolved by screwing the private bondholders out of 70% of their investment the Eurozone should be right as rain.  As should the EU.

Of course, there are still more than half of the member EU states sucking air.  That could be a problem.  But why worry about that now when we can worry about that later?

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Standard & Poor lowers the Credit Rating for Nine European Countries

Posted by PITHOCRATES - January 15th, 2012

Week in Review

Interest rates are subject to the laws of supply and demand.  The more questionable a borrower looks to be able to repay the loan the higher the interest rate.  Because there is a low supply of people willing to loan to such risky borrowers.  So they have to offer higher rates to get people to take a greater risk.

When S&P took away America’s AAA rating this did not happen, though.  Not because America was immune to the laws of supply and demand in the bond market.  But because Europe had even bigger problems.  And they just got worse (see S&P cuts credit ratings for France, Italy, Spain by JAMEY KEATEN posted 1/14/2012 on Yahoo! News).

Standard & Poor’s swept the debt-ridden European continent with punishing credit downgrades Friday, stripping France of its coveted AAA status and dropping Italy even lower. Germany retained its top-notch rating, but Portugal’s debt was consigned to junk.

In all, S&P, which took away the United States’ AAA rating last summer, lowered the ratings of nine countries, complicating Europe’s efforts to find a way out of a debt crisis that still threatens to cause worldwide economic harm.

Austria also lost its AAA status, Italy and Spain fell by two notches, and S&P also cut ratings on Malta, Cyprus, Slovakia and Slovenia.

Some are arguing that this won’t impact the Eurozone bailout.  Because of the austerity measures the troubled countries have taken.  But it doesn’t help.  It just pushes the final resolution of the Eurozone debt crisis further out.  And probably makes it more unpleasant.

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Keynesian Economics gave us the Subprime Mortgage Crisis, but the Government blames S&P

Posted by PITHOCRATES - August 20th, 2011

We call it the Subprime Mortgage Crisis, not the Mortgage-Backed Securities Crisis 

When responsible for a problem you can accept blame.  Or you can blame the messenger.  Or better yet, you can attack the messenger (see Criticism of Standard & Poor’s over U.S. credit rating compounds its troubles in Washington by Jim Puzzanghera, Los Angeles Times, posted 8/18/2011 on WGNtv).

The backlash against Standard & Poor’s for downgrading the U.S. credit rating adds to the company’s problems in the nation’s capital, where it faces investigations for its role in fueling the financial crisis with faulty assessments of mortgage-backed securities.

S&P and the other credit-rating firms are widely believed to have enabled the near market meltdown by giving AAA ratings to many securities backed by risky subprime mortgages.

So the credit-rating firms enabled the subprime mortgage crisis.  Interesting.  Because the bad subprime mortgages already existed by the time those mortgage-backed securities came to them for review.  And it was those preexisting mortgages that people defaulted on and caused the near market meltdown.  So I don’t think you can blame this all on S&P.  And remember, we call it the subprime mortgage crisis.  Not the mortgage-backed securities crisis.  Ergo, the cause was the subprime mortgages.  And S&P didn’t write those mortgages.

Subprime Mortgages:  Creative Financing to Qualify the Unqualified

Once upon a time you saved up 20% for the down payment on a new house.  Then you went to a savings and loan to get a mortgage.  Or a bank.  In those days, people saved their money.  They deposited it into their savings accounts and earned 3% interest.  The banks and savings and loans then loaned it at 6%.  And the bankers were on the golf course by 3 PM.  Hence the joke about the 3-6-3 industry.  It wasn’t very sexy.  But it was reliable.  Few defaulted.  Because a new home owner had a lot to lose from day 1 thanks to that 20% down payment.

But there was a problem with this.  Home ownership was restricted to only those people who could afford to buy houses.  Those who could put down a 20% down payment.  And who had a job with sufficient income to qualify for a mortgage.  Well, you can see the problem with this.  What about the poor people who couldn’t come up with the 20% down payment nor had a job with sufficient income to qualify for a mortgage?

After World War II home ownership became a national goal.  Home ownership equaled economic growth.  It became the American dream (no longer was it the liberty that the Founding Fathers gave us).  As the years went by some saw that the poor were being left out.  Included in that long list of those who could not qualify for a mortgage were a lot of blacks.  Activists claimed that banks were redlining.  Disapproving a larger percentage of black applicants than white.  There were protests.  Investigations.  Banks had to figure out a way to qualify the unqualified and fast.  To prove that they weren’t being racist.

And the subprime mortgage was born.   Adjustable Interest Rate (ARM).  No documentation.  Zero down.  Interest only.  All kinds of creative financing to qualify the unqualified for mortgages.  And it was a hit.  Poor people liked them.  But banks were still reluctant to issue many of them.  Because they were far more risky than a conventional mortgage.  And it was dangerous to have too many of them on their books.  But then federal government solved that problem.

Fannie and Freddie enabled the Mortgage Lenders to Approve Risky Mortgages

Enter Fannie Mae and Freddie MacGovernment Sponsored Enterprises.  They would buy (or guarantee) those risky mortgages from the banks.  The banks breathed a huge sigh of relief.  Then started selling the crap out of subprime mortgages.  Because they were exposed to no risk thanks to Fannie and Freddie.  And the housing market took off.  The government urged Fannie and Freddie to lower their standards and buy even more risky mortgages.  To keep the housing boom alive.  And they did.  Not only were home owners snatching them up.  But speculators, too.  And the term ‘house flipping‘ entered the American lexicon.

Fannie and Freddie then repackaged the subprime mortgages they bought and resold them.  Into so-called ‘safe’ investments.  Thanks to being tied to a mortgage, historically one of the safest investments in America.  Well, they were when people were putting 20% down, at least.  So these mortgage back securities were created.  Reviewed by the credit-rating agencies.  And sold to investors, mutual funds, pension funds, 401(k)s, etc.  Who bought them with abandon.  Because they were rated AAA.  Long after those risky mortgages were written.

They were time bombs just waiting to go off.  Not because of the credit rating agencies.  But because of Fannie and Freddie.  Who enabled the mortgage lenders to approve risky mortgages with no risk to themselves.  And a long standing government policy to put as many people as possible into homes.  Because economic growth all came from home ownership.  And then it happened.  There was a housing bubble thanks to easy monetary policy.  The economy was heating up.  Worried about inflation, the Fed tapped the brakes.  Raised interest rates.  And all of those ARMs reset at higher rates.  People couldn’t afford the new higher monthly payments.  The higher interest rates left the speculators with lots of houses.  That they bought with no money down.  That no one was buying.  And, well, the rest you know.

The Greatest Threat to American Fiscal Solvency is the Government’s growing Health Care Tab 

So S&P didn’t cause the subprime mortgage crisis.  Whether they gave those securities AAA ratings or not those subprime mortgage holders were going to default anyway.  The origins of the subprime mortgage crisis reach a lot further back than S&P.  But their credibility did take a hit.  So they’re trying to be a little more cautious these days.  And if anyone paid attention during the debt ceiling debates, they know the country’s long-term finances are in some serious trouble.

Jeffrey Miron wrote a paper about the health of the U.S. states.  He starts in the introduction by going over the state of affairs in the federal government (see The Fiscal Health of U.S. States by Jeffrey Miron posted 8/15/2011 on Mercatus Center).

As the worldwide financial crisis has eased, economic policy debates have shifted from the short-term issue of stabilization to the log-term issue of fiscal imbalance.  Current projections suggests that the U.S. federal government faces an exploding ratio of debt to GDP, driven in large part by spending on health insurance1.  If this trend continues, the United States will soon find itself unable to roll over its debt and be force to default, generating a fiscal crisis.

————————————————————

1  U.S. Congressional Budget Office, “CBO’s 2011 Long-Term Budget Outlook” (Washington, DC: CBO, June 2011)

Perhaps this is why S&P downgraded U.S. debt.  Because that debt ceiling deal did nothing to address the greatest threat to American fiscal solvency.  The government’s growing health care tab.  The nation indeed may be seeing some difficult times.  As will the states.

This paper offers five conclusions. First, state government finances are not on a stable path; if spending patterns continue to follow those of recent decades, the ratio of state debt to output will increase without bound. Second, the key driver of increasing state and local expenditures is health-care costs, especially Medicaid and subsidies for health-insurance exchanges under the Patient Protection and Affordable Care Act of 2009. Third, states have large implicit debts for unfunded pension liabilities, making their net debt positions substantially worse than official debt statistics indicate. Fourth, if spending trends continue and tax revenues remain near their historical levels relative to output, most states will reach dangerous ratios of debt to GDP within 20 to 30 years. Fifth, states differ in their degrees of fiscal imbalance, but the overriding fact is that all states face fiscal meltdown in the foreseeable future.

Not a pretty picture.  This whole European Socialism model is pushing both the states and the country to default.  Like it is currently pushing European nations toward default in the Eurozone.  Whose financial crisis is worst than America’s.  So far.

Keynesian Economics stimulated the Housing Market into the Granddaddy of all Housing Bubbles 

Social engineering.  Tax and spend liberalism.  Keynesian economics.   These are what gave us the subprime mortgage crisis.  Putting people into houses who couldn’t afford them.  And keeping interest rates artificially low to stimulate the housing market into the granddaddy of all housing bubbles.  The subprime mortgage crisis.  And more of the same will only push us further down the Eurozone road.  Sadly, a road often taken throughout history.  As once great nations fell, littering this road.  The Road to Serfdom.

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The future of the USPS is questionable, Ditto for Obamacare

Posted by PITHOCRATES - August 12th, 2011

New Technology has Destroyed Snail Mail 

A government established monopoly is having problems.  Revenues are down.  Costs are up.  The United States Postal Service (USPS) is virtually insolvent.  And they’re looking to take some desperate action (see Postal Service proposes cutting 120,000 jobs, pulling out of health-care plan by Joe Davidson posted 8/11/2011 on The Washington Post).

The financially strapped U.S. Postal Service is proposing to cut its workforce by 20 percent and to withdraw from the federal health and retirement plans because it believes it could provide benefits at a lower cost.

The layoffs would be achieved in part by breaking labor agreements, a proposal that drew swift fire from postal unions. The plan would require congressional approval but, if successful, could be precedent-setting, with possible ripple effects throughout government. It would also deliver a major blow to the nation’s labor movement.

You can’t blame this on outsourcing of American jobs.  Only the USPS can deliver first class mail.  And it’s not free trade.  It’s just progress.  New technology has destroyed snail mail.  People email.  Text.  Pay their bills on line.  And where competitors (UPS and FedEx) were allowed to compete the competition blew them away.

In a notice informing employees of its proposals — with the headline “Financial crisis calls for significant actions” — the Postal Service said, “We will be insolvent next month due to significant declines in mail volume and retiree health benefit pre-funding costs imposed by Congress.”

During the past four years, the service lost $20 billion, including $8.5 billion in fiscal 2010. Over that period, mail volume dropped by 20 percent.

And they can’t afford their health care.  Unless they can somehow raise revenue.  By forcing people to use mail instead of new technology.  But that’s not likely to happen.  Revenue is not much of an option here.  People have just stopped using their services.  And you can’t fix that by raising the stamp price.  You have to cut costs.  To reflect that 20% drop in business.

In a white paper on health and retirement benefits, the USPS said it was imperative to rein in health benefit and pension costs, which are a third of its labor expenses…

The USPS said the programs do not meet “the private sector comparability standard,” a statement that could be translated as meaning that government plans are too generous and too costly…

 “Unfortunately, the collective bargaining agreements between the Postal Service and our unionized employees contain layoff restrictions that make it impossible to reduce the size of our workforce by the amount required by 2015,” according to the optimization document. “Therefore, a legislative change is needed to eliminate the layoff protections in our collective bargaining agreements…”

 “We are absolutely opposed” to the layoff proposal, he said. “We are opposed to pulling out of the Federal Employees Health Benefits plan.”

It will be an interesting debate.  On the one hand, you can understand how employees don’t want to lose any pay or benefits.  But on the other hand, there is no other option.  Unless people start using first class mail again.  Because you can’t raise taxes to solve this problem.  They are not part of the government.  Even though a monopoly, they have to function as a business.  Which means costs can’t be any greater than needed to support a given revenue.

Without Competition, Nothing gets Better

Obamacare will be a lot like the USPS.  It will have out of control costs.  That will forever outpace revenues (i.e., taxes).  And it will be no doubt be a dysfunctional bureaucracy.  As all government agencies are.  As all monopolies are.

Competition makes everything better.  Therefore, without competition, nothing gets better.  Because it doesn’t have to.  That’s why the USPS lost so much business.  Because technology created better ways to do things.  So the old monopoly stagnated.  Still trying to do business with an out of date business model.  As Obamacare will do to health care.  Because it won’t have to do anything better.  And, unlike the USPS, the government can keep raising taxes to meet those out of control costs.

If there is an Obamacare, that is.

With the Individual Mandate, there is no Choice

Another court has ruled the individual mandate of Obamacare unconstitutional (see A Stunning Victory for the Constitution over Obamacare by Todd Gaziano and Robert Alt posted 8/12/2011 on Heritage).

This afternoon, a three-judge panel of the U.S. Eleventh Circuit Court of Appeals in Atlanta ruled that the individual mandate in the Patient Protection and Affordable Care Act (PPACA), more commonly known as Obamacare, is unconstitutional…

In short, the Obama administration has lost its battle to delay review of the individual mandate until after the 2012 election.  Until today, there was at least a chance that the Supreme Court would pass on the case until after its forthcoming term, but now, with a split between the Eleventh Circuit and Sixth Circuit, the High Court will have little choice but to take the case and resolve the fate of the forced-purchase mandate.  After over a year of delaying tactics, the Obama Administration has no more options to slow-walk the constitutional end-game for the mandate.  Our best estimate is that the case will be argued either in late March or in April 2012.  The Court will issue its decision near the end of its term in June, during the presidential candidate nominating season.

The Obama administration has been delaying this till after the election because this won’t help the president’s reelection chances.  During the debate to pass Obamacare, they insisted that this mandate wasn’t a tax.  But, instead, it was just commerce.  Like forcing people to buy car insurance.

But not everyone drives a car.  And those who don’t?  They don’t buy insurance.  And are not compelled to do so.  So there is a choice.  With the individual mandate, there is no choice.  Which is why the U.S. Eleventh Circuit Court of Appeals in Atlanta ruled it unconstitutional.

So this places this uncomfortable subject in an election year.  Where the Obama administration will argue in court that the mandate is a tax after all.  Which government does have the power to do.  But, of course, this will mean they were not telling the truth during the Obamacare debate.  So there’s that uncomfortable truth coming out.  And the possibility that his signature accomplishment may get overturned by the Supreme Court.  Which also won’t help his reelection chances.

You couldn’t ask for a Better Spending Cut than Obamacare

One can almost hear the cries for the government to take over the USPS.  So we can bailout the USPS with our tax dollars.  Which would probably not be a good thing what with S&P downgrading our debt because of excess government spending. 

And we really don’t need to dig our debt hole any deeper with Obamacare.  Perhaps the recent court ruling will save us from that.  And in the process restore our credit rating.  For in Obamacare lies that additional $2 trillion in spending cuts S&P wanted.  And the best part of it is that it’s all future spending.  No one will lose anything by cutting Obamacare.  You couldn’t ask for a better spending cut.  No one loses.  Except, of course, Obama.

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Insufficient Spending Cuts triggers S&P Downgrade, not Insufficient Taxes

Posted by PITHOCRATES - August 6th, 2011

Ah, the Good Old Days when Communists didn’t school Americans in Capitalism

It happened.  S&P downgraded the U.S.  Just like they said they would if we didn’t make $4 trillion in spending cuts.  And our patron is not pleased (see China attacks US debt ‘addiction’ after America loses AAA credit rating by Richard Blackden posted 8/6/2011 on The Telegraph).

“The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” China said in a commentary carried by the Xinhua News Agency.

Ouch.  Strong words from a communist.  The Soviet Union never gave us lessons in capitalism when there was a Soviet Union.  Then again, we always had a AAA bond rating back then.  And their GDP growth wasn’t greater than ours.  Ah, the good old days.  When communists didn’t school Americans in capitalism.

Vince Cable, the British Business Secretary, said the downgrade was an “entirely predictable consequence of the mess that the Congress created a few weeks ago when they couldn’t agree on lifting the debt ceiling.”

Francois Baroin, France’s finance minister, said his country had total confidence in the US economy, while India called the “situation was grave” and Russia said it would keep the level of dollar investments in its national reserve funds, adding: “There is not a great difference between AAA and AA+.”

Those are some very supportive words from the Russians.  Which differ slightly from previous remarks when Putin said, “They are living like parasites off the global economy and their monopoly of the dollar.”  It’s subtle but it’s there.  On the one hand the downgrade is no big deal.  On the other we’re the scum of the earth.  It’s subtle but there is a distinct difference in these statements.  They resent us.  But they can’t live without us.  Kind of sweet.  In a bitter way.

In an explanation of the decision, S&P said that despite last week’s agreement, which raised the $14.3trillion debt ceiling and promised cuts of $2.5 trillion to the deficit over the next decade, the ratio of America’s public debt to the size of its economy may climb to 79pc in 2015 and 85pc by 2021. It is understood that an agreement that had delivered a $4 trillion reduction in the debt pile would have preserved the AAA rating.

S&P downgraded us, of course, for having too much debt.  Now debt grows from having annual deficits.  And deficits are caused by either taxing too little.  Or by spending too much.  S&P wanted to see the debt reduced by $4 trillion.  They only got $2.5 trillion.  Hence the downgrade. 

You can’t Reduce the Debt $4 Trillion by Raising Taxes, at least not Mathematically

Reducing the debt by $4 trillion won’t be easy.  That’s a lot of money.  About $333 billion each month.  Current tax revenue into Washington is about $200 billion each month.  So, to get this $4 trillion in deficit reduction with new taxes only would require raising monthly tax revenue from $200 billion to $533 billion (an increase of 166%).  Increasing taxes by 166% (income taxes, payroll taxes, capital gains taxes, etc.) is going to do some devastating economic damage.  The kind the economy is not going to get up and walk away from.  So it’s a non-solution.

But what about a balanced approach?  In addition to that $2.5 trillion in cuts we throw in $1.5 trillion in new taxes for a total $4 trillion in debt reduction.  $1.5 trillion is about $125 billion each month.  This would increase monthly tax revenue from $200 billion to $325 billion (an increase of 65%).  This will also do some serious economic damage.  So it’s a non-solution, too.

And sticking it to the ‘rich’ won’t work either.  For they can’t afford it.  Let’s look at the numbers.  The total adjusted gross income reported in 2009 was $7.626 trillion.  The percent of that total earned by the top 5% earners (earning $159,619 or more) is 31%.  So the total income of the top 5% in 2009 is $2.36 trillion.  Total federal income taxes paid in 2009 was $1.05 trillion.  The top 5% of earners pay 59% of all federal income taxes.  So the total they paid in income taxes in 2009 is $570 billion.  This leaves a balance of $1.79 trillion of their earnings they didn’t pay in federal income taxes, or about $150 billion each month.  Which is not enough to pay an additional $333 billion each month.  But it is enough to pay an additional $125 billion each month.  As long as these people are willing to pay an effective federal income tax rate of 87.6%.  Which I doubt.  For another 12.4% in taxes (state, country, local, property, gas, sales, etc.) and they’re working for free.  Like a slave.  Only without the free room and board.

You can’t reduce the debt enough by raising taxes a lot.  Or a little.  The rich people (those earning $159,619 or more) will run out of earnings before they can pay the $4 trillion in debt reduction.  It’s just mathematically impossible.  The only way you can do this is by cutting spending.  And they didn’t.  Hence the downgrade.

Paul Krugman ‘defends’ Ronald Reagan’s and George W. Bush’s Deficits

Meanwhile, while the S&P tragedy unfolds, Paul Krugman ‘defends’ Ronald Reagan‘s and George W. Bush‘s deficits.  Saying that big deficits aren’t a big deal.  And we don’t have to knock ourselves out trying to pay down the debt they create.  For depreciation of the dollar makes those once large numbers become trivial (see The Arithmetic of Near-term Deficits and Debt by Paul Krugman posted 8/6/2011 on The New York Times).

What matters for debt sustainability is the real interest rate, since what matters is keeping real debt, not nominal debt, from growing. (World War II debt never got paid off, it just eroded in real terms to the point where it was trivial). As of yesterday, the US government could lock in 30-year bonds at a real interest rate of 1.25%. That means that a trillion dollars in extra debt would mean $12.5 billion a year in additional real interest payments.

Meanwhile, the CBO estimates potential real GDP in 2021 at about $18 trillion in 2005 dollars, or around $19 trillion in 2011 dollars.

Put these together, and they say that an extra trillion in borrowing adds something like 0.07% of GDP in future debt service costs. Yes, that zero belongs there. The $4 trillion S&P said it needed to see clocks in at less than 0.3% of GDP.

Of course I’m extrapolating his remarks to apply them to the Reagan and Bush deficits.  For if they hold for a $1.6 trillion dollar deficit then they surely hold for a $200 billion (Reagan) and a $400 billion deficit (Bush).  The key is to make that old debt worth less by making the dollar worth less.  The more you devalue the dollar the less that debt held by the Chinese is worth.  As well as the debt held by pension funds and retirement accounts.  And our personal savings.  For inflation is a killer of dollar-denominated assets.  Which is good for the debtor (the seller of treasuries).  But bad for the creditor (the buyer of treasuries).

Further extrapolating Krugman’s remarks one must conclude that with the deficit being trivial he would endorse the economic boom of the Eighties.  And agree that Reaganomics was a success.  For the argument has always been that Reaganomics traded exceptional GDP growth for deficits.  But with deficits being trivial, there is no tradeoff for that exceptional GDP growth.

To Live within our Means we will have to Cut Spending 

True, inflation will make bonds easier to redeem 30 years later.  But too much inflation causes a lot of damage.  Especially to those living on fixed incomes.  No, a better solution would be to live within our means.  And that doesn’t mean raising taxes.  Besides, the rich don’t have much left to give.  No, if we’re going to live within our means we will have to cut spending.  As painful as that may be.  And the longer we wait to make those cuts the more painful those cuts will be.

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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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