Ratings agency Standard & Poor's served notice that it planned to downgrade the U.S. government's AAA credit rating but is reconsidering, a senior Obama administration official said.
The official said the agency acknowledged some errors after the administration challenged S&P's analysis of the government's revenue and deficit picture.
The source, a senior official involved in the discussions, insisted the agency was off by "trillions" in its economic model.
The AAA rating enables nations to borrow funds at lower costs because their governments are considered stable and their bonds safe.
S&P: Our last presentation comes from our most prestigious member: the United States of America. America?
USA: Eh... just a second... just a second!
S&P: Pencils down, pruneface.
USA: Uh, yes, here I am. OK, now... hello there. Now, we all know Congress allows us to talk about deficit reduction. But what if we want to enact deficit reduction? Well now we can, thanks to my new invention: the SuperCongress! The cuts travel past this coffee stain here, around the olive pit and into this cigar burn. And this appears to be a... a doodle of myself as a cowboy...
USA: But the SuperCongress is brilliant, I tell you! Think of the astronomical savings you'll realize thanks to me!
S&P: I've waited a hundred years for this, America. I give your credit rating the worst grade imaginable: An A-minus... minus!
An indicator followed by veteran technical analyst John Roque that has perfect results for almost twenty years just flashed a buy signal.
In February 1993, Canada was in the midst of financial catastrophe, or so one would have concluded by reading the newspapers and watching TV. “Debt Crisis Looms,” screamed a banner front-page headline in the national newspaper, the Globe and Mail. A major national television special reported that “economists are predicting that sometime in the next year, maybe two years, the deputy minister of finance is going to walk into cabinet and announce that Canada’s credit has run out…. Our lives will change dramatically.
The phrase “debt wall” suddenly entered the vocabulary. What it meant was that, although life seemed comfortable and peaceful now, Canada was spending so far beyond its means that, very soon, powerful Wall Street firms like Moody’s and Standard and Poor’s would downgrade our national credit rating from its perfect Triple A status to something much lower. When that happened, hypermobile investors, liberated by the new rules of globalisation and free trade, would simply pull their money from Canada and take it somewhere safer. The only solution, we were told, was to radically cut spending on such programs as unemployment insurance and health care. Sure enough, the governing Liberal Party did just that, despite having just been elected on a platform of job creation.
Two years after the deficit hysteria peaked, the investigative journalist Linda McQuaig definitively exposed that a sense of crisis had been carefully stoked and manipulated by a handful of think tanks funded by the largest banks and corporations in Canada, particularly the C. D. Howe Institute and the Fraser Institute (which Milton Friedman had always actively and strongly supported). Canada did have a deficit problem, but it wasn’t caused by spending on unemployment insurance and other social programs. According to Statistics Canada, it was caused by high interest rates, which exploded the worth of the debt much as the Volcker Shock had ballooned the developing world’s debt in the eighties. McQuaig went to Moody’s Wall Street head office and spoke with Vincent Truglia, the senior analyst in charge of issuing Canada’s credit rating. He told her something remarkable: that he had come under constant pressure from Canadian corporate executives and bankers to issue damning reports about the country’s finances, something he refused to do because he considered Canada an excellent, stable investment. “It’s the only country that I handle where, usually, nationals from that country want the country downgraded even more – on a regular basis. They think it’s rated too highly.” He said he was used to getting calls from country representatives telling him he had issued too low a rating. “But Canadians usually, if anything, disparage their country far more than foreigners do.”
That’s because, for the Canadian financial community, the “deficit crisis” was a critical weapon in a pitched political battle. At the time Truglia was getting those strange calls, a major campaign was afoot to push the government to lower taxes by cutting spending on social programs such as health and education. Since these programs are supported by an overwhelming majority of Canadians, the only way the cuts could be justified was if the alternative was national economic collapse – a full blown crisis. The fact that Moody’s kept giving Canada the highest possible bond rating – the equivalent of an A++ – was making it extremely difficult to maintain the apocalyptic mood.
Investors, meanwhile, were getting confused by the mixed messages. Moody’s was upbeat about Canada, but the Canadian press constantly presented the national finances as catastrophic. Truglia got so fed up with the politicised statistics coming out of Canada, which he felt were calling his own research into question, that he took the extraordinary step of issuing a “special commentary” clarifying that Canada’s spending was “not out of control,” and he even aimed some veiled shots at the dodgy math practiced by right-wing think tanks. “Several recently published reports have grossly exaggerated Canada’s fiscal debt position. Some of them have double counted numbers, while others have made inappropriate international comparisons… These inaccurate measurements may have played a role in exaggerated evaluations of the severity of Canada’s debt problems.” With Moody’s special report, word was out that there was no looming “debt wall” – and Canada’s business community was not pleased. Truglia says that when he put out the commentary, “one Canadian… from a very large financial institution in Canada called me up on the telephone screaming at me, literally screaming at me. That was unique.”
By the time Canadians learned that the “deficit crisis” had been grossly manipulated by the corporate-funded think tanks, it hardly mattered – the budget cuts had already been made and locked in. As a direct result, social programs for the country’s unemployed were radically eroded and have never recovered, despite many subsequent surplus budgets. The crisis strategy was used again and again in this period. In September 1995, a video was leaked to the Canadian press of John Snobelen, Ontario’s minister of education, telling a closed-door meeting of civil servants that before cuts to education and other unpopular reforms could be announced, a climate of panic needed to be created by leaking information that painted a more dire picture than he “would be inclined to talk about”. He called it “creating a useful crisis."
Dear Mr. Obama, while you blame the GOP for the downgrade, your party controlled all of Washington for two years & extended the Bush cuts.
April 18: Mitt Romney: “The Obama presidency was downgraded today.”
April 20: Mitt Romney: “Standard & Poor’s, one of the rating agencies, just downgraded their view of the future for America…If you will, they downgraded the Obama presidency.”
July 15: WSJ — “The Obama downgrade.”
...People are focused on the market implications of the downgrade, but that isn’t what this is about. It’s about a President who will now be relentlessly tagged with responsibility for a rating given by a disgraced organization whose victims should have liquidated them long ago.
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012,remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.
Have you ever heard of a little country called the United Kingdom? And a nice aid package called "Lend-Lease", where we helped them out in WWII but expected them to repay us?
In 2006, they actually did.
And that tells you why they have a triple-A while we now have an AA+.
No other advanced country has a major political party influenced by supply-side economics and the moral teachings of Ayn Rand, and therefore, no other major political party can match the GOP's theological opposition to revenue. One result is that the Republican Party is always going to use its political power to reduce revenue, which means that the U.S. budget can never be stable for an extended period of time. If a center-left coalition succeeds in stabilizing the budget, Republicans will eventually destabilize it. It is difficult to imagine the GOP, as it's currently structured, encountering conditions in which they believe taxes are not too high.
You Got Gamified! How Our Government Runs Like Foursquare
That's the thing about games: they're only as good as the rules allow them to be. And it's hard to introduce new rules into a game that's already ongoing. Instead of starting from behind the veil of ignorance, players know what position they already hold in the game. Thus, instead of striving for an abstract notion of fairness, they’re likely to only support new rules that benefit them in some way. And that’s where we are in politics right now. Faced with a game that seems to be dysfunctional, it’s understandable that we might want to change the rules (or even make up a new game entirely). That might work. But if history is any guide, it’s unlikely that such revisions will have their intended effect.
Downgrade Heralds New Era
All of that said, there a sliver of a silver lining — and an important one. America’s downgrade may serve as a wakeup call for its policymakers. It is an unambiguous and loud signal of the country’s eroding economic strength and global standing. It renders urgent the need to regain the initiative through better economic policymaking and more coherent governance.
There is a risk, of course, that different political factions will use S&P’s action as a vindication of their prior beliefs. Democrats would argue that it is recent Republican political sabotage that pushed S&P over the edge while Republicans would argue that we are here due to irresponsible government spending by the Democrats.
For the sake of their country and the wider global economy, both parties should resist the urge to begin bickering. Instead they should seize this potential “Sputnik Moment” — a visible shock to the national psyche that can unify Americans around a common vision and a renewed sense of purpose — that of halting gradual secular decline by putting the country back on the path of high growth, job creation and financial soundness.
To be fair to Mr. Beers, his agency did specifically cite the political brinkmanship of a number of US Congressmen, who seemed far too inclined to contemplate the option of default as a means of securing greater spending cuts on the part of the US government. But that wasn’t the full story. S&P placed particular emphasis on the size of the cuts, implicitly suggesting that larger cuts would have superseded the political questions. That’s intellectual dishonesty at its worst.
Here are a few questions the S&P ought to have considered before it issued its debt downgrade:
Is government spending so high that it is competing with private sector spending plans? Certainly not – substantial amounts of plant and equipment remain idle, unemployment remains at depression like levels, and there is ample capacity for firms to expand if they want to do so. Businesses, however, are constrained by inadequate demand for their output, a phenomenon which would become even worse if the US were to follow the prescribed level of cuts advocated by S&P to retain its AAA rating with these economic blackmailers. That is a real cost (and it also drives those “horrible” government deficits higher, as tax revenues plunge and social welfare expenditures via the automatic stabilizers rise).
Lesson 2: Deflation must be halted and reversed, and the credit system restarted. Today, as in the early 1930s, these two parts of the puzzle are tightly interrelated, as Fisher explained. Deflation will not stop if the collapse of the credit system is not contained, and the collapse of the credit system will not stop until the deflation of asset and goods prices is controlled. A trillion dollars of fiscal stimulus today will not avoid catastrophe if the financial stabilisation fails. Conversely, the sooner a credible, comprehensive, and effective financial stabilisation plan is implemented, the lower the actual cost of “true” fiscal support needed for the social safety net.
[there are] two dominant factors [causing depressions], namely over-indebtedness to start with and de-flation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two. In short, the big bad actors are debt disturbances and price- level disturbances.
While quite ready to change my opinion, I have, at present, a strong conviction that these two economic maladies, the debt disease and the price-level disease (or dollar disease), are, in the great booms and de- pressions, more important causes than all others put together."
The Business of Austerity
[I]t’s time for business to realize that, on the question of managing the economy, House Republicans will let ideology trump economic interest. After all, it was proto-Tea Partiers in the House who, in 2008, voted down TARP the first time around, erasing more than a trillion dollars in stock-market value in a single day. Now, once again, House Republicans have pursued a strategy that business doesn’t want and that will damage investors. The grim truth is that, at this point, we’d be better off if the House Republicans really were the handmaidens of corporate America, rather than ideologues who prefer crisis to compromise.
How Bad Is It?
On Wall Street, unlike in Washington, there is general agreement that the 2009 stimulus package was one of the main reasons that the economy expanded, however slowly, in the past couple of years. So suggestions that a new jobs package would spook the markets are without foundation. Even now, after the bond downgrade, the markets and credit-ratings agencies would probably embrace a carefully costed package that is limited in duration, because it makes economic sense. The quickest way to reduce the budget deficit is to get potential taxpayers back to work.
Today the economy has 5 percent fewer jobs — or 6.8 million — than it had before the last recession began. [...] Even those Americans who are working are generally working less; the typical private sector worker has a shorter workweek today than four years ago.
Employers shed all the extra work shifts and weak or extraneous employees that they could during the last recession. As shown by unusually strong productivity gains, companies are now squeezing as much work as they can from their newly “lean and mean” work forces. [...]
Adjusted for inflation, personal income is down 4 percent, not counting payments from the government for things like unemployment benefits. Income levels are low, and moving in the wrong direction: private wage and salary income actually fell in June, the last month for which data was available.
Corporate profits are at record highs and, adjusted for inflation, were 22 percent greater in the first quarter of this year than they were in the last quarter of 2007.
Once again: S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P’s concerns.
"Boosting U.S. Exports: Selected Issues for Congress," July 21, 2011
"Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy," July 18, 2011
"Inflation: Causes, Costs, and Current Status," July 26, 2011
"Treasury Securities and the U.S. Sovereign Credit Default Swap Market," July 25, 2011
"The Unemployment Trust Fund (UTF): State Insolvency and Federal Loans to States," July 8, 2011
"Can Contractionary Fiscal Policy Be Expansionary?," June 6, 2011
“What remains to be seen is whether any discussion of taxes is appropriate,” Kyl said. “I think it’s pretty unlikely.”
Dylan Ratigan, Mad as Hell: His Epic Network Moment
And until we do that, we have to deal with the extraction that is at foot, it is the reason the financial markets are behaving the way they’re behaving, it is a mathematical fact! This is not some opinion; this is a mathematical fact. Tens of trillions of dollars are being extracted from the United States of America. Democrats aren’t doing it, Republicans are not doing it, an entire integrated system, financial system, trading system, taxing system, that was created by both parties over a period of two decades is at work on our entire country right now. And we’re sitting here arguing about whether we should do the $4 trillion plan that kicks the can down the road for the President for 2017, or burn the place to the ground, both of which are reckless, irresponsible, and stupid.
Can the Middle Class Be Saved?
In political speeches and in the media, the future of the middle class is often used as a stand-in for the future of America. Yet of course the two are not identical. The size of the middle class has waxed and waned throughout U.S. history, as has income inequality. The post-war decades of the 20th century were unusually hospitable to the American middle class—the result of strong growth, rapid gains in education, progressive tax policy, limited free agency at work, a limited pool of competing workers overseas, and other supportive factors. Such serendipity is anomalous in American history, and unlikely to be repeated.
Yet if that period was unusually kind to the middle class, the one we are now in the midst of appears unusually cruel. The strongest forces of our time are naturally divisive; absent a wide-ranging effort to constrain them, economic and cultural polarization will almost surely continue. Perhaps the nonprofessional middle class is rich enough today to absorb its blows with equanimity. Perhaps plutonomy, in the 21st century, will prove stable over the long run.
But few Americans, no matter their class, will be eager for that outcome.
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