In a patriotic act of tough love, the Wall Street bond-rating agency on Friday evening downgraded America’s sovereign debt one notch for the first time since it was granted in 1941 — from its sterling AAA credit rating to AA+. As S&P explained, “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 challenges.”
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Naturally, this came as a shock to America’s hapless Treasury secretary, Timothy Geithner. “No risk of that,” Geithner specifically predicted about an S&P downgrade last April 19 on the Fox Business Network. “No risk.”
In the short term, this unprecedented news will hammer national prestige, hike interest rates, and heap short-term agony on an already achy nation. However, this startling development may supply the face-down-in-the-gutter moment that Washington’s bipartisan spendaholics desperately need to hit rock bottom, grow up, and enter rehab. Alas, everything else has failed during the Bush-Obama era of the ever-expanding state.
Consider Washington’s latest fiscal flop. There is plenty to dislike about the recently enacted bipartisan deal to cut spending and reduce the national debt. For starters, it neither cuts spending nor reduces the national debt. After weeks of federal handwringing, taxpayers should hope that our masters in Washington become serious about slashing spending. If not, this republic will implode, not sometime on “the children,” but soon — atop today’s struggling adults.
“The budget deal doesn’t cut federal spending at all,” Cato Institute analyst Chris Edwards explains. “The ‘cuts’ in the deal are only cuts from the Congressional Budget Office’s ‘baseline,’ which is a Washington construct of ever-rising spending. . . . The federal government will still run a deficit of $1 trillion next year. This deal will ‘cut’ the 2012 budget of $3.6 trillion by just $22 billion, or less than 1 percent.”
Edwards observes that Washington’s “cuts” rarely reduce anything. President Obama, for instance, proposed boosting the Corporation for Public Broadcasting’s funding from $432 million this year to $451 million in FY 2012. Therefore, handing CPB $441 million would constitute a $10 million “cut” in Washington, versus a $9 million increase in the real world.
Source: Cato Institute
Thus, as Edwards vividly illustrates at Cato’s downsizinggovernment.org website, these budget “cuts” actually raise federal discretionary spending non-stop for the next ten years — from $1.04 trillion in FY 2012 to $1.23 trillion in FY 2021. “No program or agency terminations are identified in the deal,” Edwards laments. “None of the vast armada of federal subsidies is targeted for elimination.”
As for red ink, Washington just extended the federal credit card’s limit from $14.3 trillion to $16.7 trillion. In 2021, the national debt is expected to reach $22 trillion — a figure 54 percent above $14.3 trillion. What debt reduction?
Washington refuses to learn what millions of overextended Americans recognize daily: One cannot escape debt by tunneling ever deeper into it. As the economy cools afresh, the feds blissfully assume that the rest of the Earth will keep lending to Uncle Sam, even as he tragically resembles a junkie trembling for “just one more fix” — to be purchased on account and settled . . . sometime. “Promise.”
On a positive note about Geithner, I believe he did take out almost the entire debt ceiling in debt before the downgrade, so treasury will be somewhat insulated from the downgrade for another year or so.
But the problem is the 'deal" was a pyrrhic victory. The Faustian bargain decrees that military security will be cut in order to maintain social security. Neither can peacefully co-exist anymore. Who gets the prescience award? The Russians, the Chinese and S&P. When its too late you find out their concern was 'tough hate'. The only ones whose eyes were fully wide shut were the fools that made the agreement. They waved the paper but forgot to "declare peace in our time". Solitudinem faciunt, pacem appellant.
From Social Security to the Great Society, Medicare and Medicaid, we created the "Wimpy economy". Remember Wimpy from Popeye? "I'll gladly pay you Tuesday for a hamburger today." Well, it's finally Tuesday....
America's political leaders are singularly unqualified to lead. Their criminal incompetence is appalling. We lost the confidence of the world because this incompetence is clearly evident. We don't need compromise and bipartisanship, we need intelligent and qualified statesmen of impeccable character who are willing to make hard decisions. Flush the rest.
Forget the BBA I'd like an amendment that defines the word "cut". Reducing the rate at which something increases is what I would call a "rate reduction". Calling a "rate reduction" a "cut" is very easy to define it is called a "lie"
S&P is acting beyond their job description, and moreover, they are inconsistent and negligent about it.
Their job is to say whether bonds will be paid off per contract. US bonds, no problemo. As Greenpsan noted, all we got to do is print money.
Will the money be worth much? Not S&P's call. Never has been.
And if they want to degrade bonds becuase of possible currency inflation, then every corporate bond, municipal bond, and mortgage in America should be downgraded too. They will be equally affected by inflation. But S&P negligently failed to do this
Deroy.....I agree with your patriotic assertion but for a different reason.
WHY NOW? Why did S&P chose now, after all this time, to issue a downgrade.
Because the Treasury asked them to!
Forget not that the debt ceiling had just been raised and the Treasury had hundreds of billions of dollars of catching up to do. They needed to sell a lot of Treasury debt and the Fed had already concluded their Permanent Open Market Operations of buying Treasuries (QE2). The Treasury needed a ready buyer of Treasury Notes to sell into or they would drive interest rates up with there selling.
Enter a downgrade by S&P to stampede the herd out of risk assets and into safe haven. They created a massive sell off of equities with all that money going into the Treasuries that Geithner needed to unload.
Patriotic of them indeed.
Please note that while a similar downgrade of France would be logical, this will not be necessary. Nobody is going to stampede into Euros.
