Archive for July 15th, 2011
09:36 15Jul11 RTRS-S&P PLACES U.S. ‘AAA/A-1+’ RTGS ON CREDITWATCH NEGATIVE
09:37 15Jul11 RTRS-RPT-S&P PLACES U.S. RATINGS ON CREDIT WATCH NEGATIVE
09:38 15Jul11 RTRS-S&P SAYS AT LEAST A 1 IN 2 CHANCE IT COULD CUT RATING
09:38 15Jul11 RTRS-S&P SAYS POLITICAL DEBATE ON DEBT CEILING A SIGNIFICANT UNCERTAINTY
09:39 15Jul11 RTRS-S&P SAYS SEES INCREASING RISK OF POLICY STALEMATE
09:39 15Jul11 RTRS-S&P SAYS COULD LOWER U.S. RATINGS WITHIN 3 MONTHS
09:39 15Jul11 RTRS-S&P SAYS MIGHT CUT RATINGS BY 1 OR MORE NOTCHES IN AA RANGE
09:39 15Jul11 RTRS-S&P SAYS BELIEVES RISK OF PAYMENT DEFAULT SMALL BUT INCREASING
The danger is right there in the bold.
This is not about the “ceiling.” It is about fiscal sustainability.
– We may lower the long-term rating on the U.S. by one or more notches into the ‘AA’ category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.
There it is.
Folks, it is time to cut the crap. We must cut the growth of government debt to below the growth in GDP. Since at present the government is providing ~12% of GDP via borrowing, this means we must cut federal spending by something closer to 15% of GDP, since GDP will contract when we do this (it’s the math, and is inescapable) and debt must shrink faster than GDP does, or grow slower than it does.
Incidentally, that means we must cut federal spending approximately in half, double tax receipts (not rates), or some combination of the two that adds to the same figures.
And we must do it now, because the laws of exponents, which we cannot change, state that the longer we take to get to the above point the greater the cut in the federal budget will have to be.
In other words we will soon get to the point where it makes absolutely no difference what we do – default will become mathematically inevitable.
This sucks, and I understand it sucks. It doesn’t matter if it sucks. It also doesn’t matter if Congress likes this or not.
In blunt language it no longer matters whether there is political will to act as is required. Arithmetic does not care if you like the answer that it provides.
I have been warning of this outcome for four years, and saying that time, while available, is not unlimited.
We are now out of time.
Have you noticed that a really bad mood seems to have descended on world financial markets? Fear and pessimism are everywhere. The global economy never truly recovered from the financial crisis of 2008, and right now everyone is keeping their eyes open for the next “Lehman Brothers moment” that will send world financial markets into another tailspin. Investors have been very nervous for quite some time now, but this week things seem to be going to a whole new level. Fears about the spread of the debt crisis in Europe and about the failure of debt ceiling talks in the United States have really hammered global financial markets. On Monday, the Dow Jones Industrial Average dropped 151 points. Italian stocks fared even worse. The stock market in Italy fell more than 3 percent on Monday. The stock markets in Germany and France fell more than 2 percent each. On top of everything else, the fact that protesters have stormed the U.S. embassy in Syriais causing tensions to rise significantly in the Middle East. Everywhere you turn there seems to be more bad news and large numbers of investors are getting closer to hitting the panic button. Hopefully things will cool down soon, because if not we could soon have another full-blown financial crisis on our hands.
Even many of those that have always tried to reassure us suddenly seem to be in a really bad mood.
For example, U.S. Treasury Secretary Timothy Geithner admitted to “Meet the Press” that the U.S. economy is really struggling and that for many Americans “it’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for a long time to come.”
Does Geithner know something that we don’t?
To say that what Americans are facing will be “harder than anything they’ve experienced in their lifetime now, for a long time to come” is very, very strong language.
It almost sounds like Timothy Geithner could be writing for The Economic Collapse blog.
It certainly is not helping things that the Democrats and the Republicans still have not agreed on a deal to raise the debt ceiling. It is mid-July and Barack Obama and John Boehner continue to point fingers at each other.
Of course if they do reach a “deal” it will likely be a complete and total joke just like their last “deal” was.
But for now they are playing politics and trying to position themselves well for the 2012 election season.
Meanwhile, world financial markets are starting to get a little nervous about this situation. The newly elected head of the IMF, Christine Lagarde, has stated that she “can’t imagine for a second” that we are going to see the U.S. default on any debt. Most investors seem to agree with Lagarde for now, but if we get to August 2nd without a deal being reached things could change very quickly.
But it isn’t just the debt ceiling crisis that is causing apprehension in the United States. The truth is that there are a host of indications that the U.S. economy is continuing to struggle.
Even big Wall Street banks are laying people off. A recent Reuters article described the bad mood that has descended on Wall Street right now….
Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and some other large U.S. investment banks are not just laying off weak performers and back-office employees. They are also cutting the pay of those they are keeping, scrutinizing expense reports and expecting even the most profitable workers to bring in more business for the same amount of compensation.
That is not a good sign for the U.S. economy.
If the corrupt Wall Street banks are even struggling, what does that mean for the rest of us?
But the big trouble recently has been in Europe. The sovereign debt crisis continues to get worse and worse.
As I wrote about yesterday, the emerging financial crisis in Italy has EU officials in a bit of a tizzy. If Italy requires a bailout it is going to be an unmitigated disaster.
One of the most respected financial journalists in Europe, Ambrose Evans Pritchard, says that financial tensions in the EU are rising to dangerous levels….
If the ECB’s Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago – and I think he is – it is hard see how the threat is any less serious right now.
Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.
Last year it was just small countries like Greece and Ireland that were causing all the trouble.
Now Italy (the fourth largest economy in the EU) and Spain (the fifth largest economy in the EU) are making headlines.
Up to this point, the EU has had all kinds of nightmares just trying to bail countries like Greece out.
What is going to happen if Italy or Spain goes under?
At this point things with Greece have gone so badly that some EU officials are actually suggesting that Greece should just default on some of the debt.
Yes, you read the correctly.
There are news reports coming out of Europe that say that EU leaders are actually considering allowing the Greek government to default on some of their bonds. According to The Telegraph, “the move would be part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.”
All of this chaos is causing bond yields in Europe to go soaring.
Earlier today, The Calculated Risk blog detailed some of the stunning bond yields that we are now seeing in Europe….
The Greek 2 year yield is up to a record 31.1%.
The Portuguese 2 year yield is up to a record 18.3%.
The Irish 2 year yield is up to a record 18.1%.
And the big jump … the Italian 2 year yield is up to a record 4.1%. Still much lower than Greece, Portugal and Ireland, but rising.
Could you imagine paying 31.1% interest on your credit cards?
Well, imagine what officials in the Greek government must be feeling right about now.
If these bond yields do not go down, we are going to have a full-blown financial crisis on our hands in Europe. If these bond yields keep rising, we are going to have a complete and total financial nightmare in Europe.
The only way that any of these nations that are drowning in debt can keep going is if they can borrow more money at low interest rates. There are very few nations on earth that would be able to survive very high interest rates on government debt for an extended period of time.
Pay attention to what is happening in Europe, because it will eventually happen in the United States. Right now we are only paying a little more than $400 billion in interest on the national debt each year because of the super low interest rates we are able to get.
When that changes, our interest costs are going to absolutely skyrocket.
Not that the United States needs any more economic problems.
Right now Americans are more pessimistic about the economy than they have been in ages.
In a recent article entitled “16 Reasons To Feel Really Depressed About The Direction That The Economy Is Headed” I noted a number of the recent surveys that seem to indicate that the American people are in a real bad mood about the economy right now….
*One of the key measures of consumer confidence in the United States has hit a seven-month low.
*According to Gallup, the percentage of Americans that lack confidence in U.S. banks is now at an all-time high of 36%.
*According to one recent poll, 39 percent of Americans believe that the U.S. economy has now entered a “permanent decline”.
*Another recent survey found that 48 percent of Americans believe that it is likely that another great Depression will begin within the next 12 months.
The American people are in a really bad mood and investors around the world are in a really bad mood. More bad financial news seems to come out every single day now. Everyone seems to be waiting for that one “moment” that is going to set off another financial panic.
Hopefully we can get through the rest of this summer without world financial markets falling apart. But the truth is that the global economy is even more vulnerable today than it was back in 2008. None of the things that caused the financial crash of 2008 have been fixed.
We will eventually have a repeat of 2008. In fact, next time things could be even worse.
The entire world financial system is a house of cards sitting on a foundation of sand. Eventually another storm is going to come and the crash is going to be great.
And more from Ms. McMorris-Rodgers (sent to me by one of the folks in her office; thank you!)
McMorris Rodgers Calls for
Balanced Budget Amendment
Renews Demand for Fiscal Accountability at
House Leadership Press Conference
Washington, DC – Rep. Cathy McMorris Rodgers (R-WA), Vice Chair of the House Republican Conference, strongly advocated for a balanced budget amendment to the Constitution today at a House Republican Leadership press conference in support of the measure.
“Even before I arrived in Congress, I called for a balanced budget amendment, and today I am more convinced than ever that we need this amendment to bring spending discipline to Congress, put our economy on a solid footing, and reduce the debt burden on our children and grandchildren,” said Rep. McMorris Rodgers.
The federal government has run a budget deficit for 47 of the last 51 years. According to the Obama Administration, the deficit will be $1.6 trillion this year – an all-time record. The national debt currently stands at $14.5 trillion.
“Forty-nine states require a balanced budget by law,” said Rep. McMorris Rodgers. “There’s no reason the federal government can’t do the same.”
In 1995, a balanced budget amendment passed the House but failed to meet the two-thirds requirement in the Senate by a single vote.
The U.S. House is expected to vote on a balanced budget amendment on July 20.
Here is my reply:
You can have a balanced budget today.
Refuse to raise the debt ceiling.
We’ve heard this siren song about an amendment and such for 30 years, and it’s never happened. Nor will it – the House and Senate, along with Obama, are pulling a Reagan – make promises and maybe get tax changes now, but the budget cuts happen never.
I remember the Reagan go-around with this. There’s nothing that can be done to stop it, other than cutting up the credit card. The fact of the matter is that Congress can and does lie, and the President can and does lie. The people have absolutely no recourse when both parties are willing to lie, as voting out one party and in the other doesn’t stop the lying when both are liars!
The American people are sick and tired of the lies, and they support NOT raising the ceiling. As I wrote on yesterday, this would NOT force a default on Social Security and Medicare, nor on the debt.
It WOULD force an immediate balancing of the budget and the necessary conversation with the American people on what we expect from government and how we’re going to fund it with current revenues.
So….. is the House ready to stand firm and force this to be done the right way, in a way that’s enforceable and will actually happen – right now, right here, today?
I can tell you this – all the arm-waving and promises over the last 30 years on this subject have made for great press releases, but when it comes to fact, they’ve all been lies.
Every last one of them.
Let’s see a public call in the form of a presser calling for no debt ceiling increase under any circumstances. No ifs, ands or buts.
A brave new banking system – while public is told banking system is healthy FDIC quietly grows troubled bank list by 180 and adds over 1,600 employees in the last two years to deal with bank failures.
The banking system in the United States rests on a very thin layer of faith and that faith has been shaken by the current financial crisis. The retail banking system is largely a facade that now latches on to taxpayer bailouts to fund speculative investments through their investment banking divisions. The repeal of Glass-Steagall has been an absolute failure for allowing this commingling of financial functions. I find it interesting that while we get a public stance that all is well on the banking front, we find that the FDIC keeps adding employees to handle bank failures and the number of problem institutions continues to grow. Of course this is the kind of information that is buried deep in websites and financial statements while most of the press focuses on distractions.
Why would FDIC keep expanding through recovery?
I was digging through FDIC data and found the below information rather enlightening. While we are told that the condition of our financial system is getting better, we find that the FDIC is adding more and more employees while the number of banks deemed “problems” continues to grow:
In the last two years the number of problem institutions jumped from 702 in 2008 to 888 currently. We have also added many more FDIC employees (from 6,557 to 8,233). What I find illuminating is that in 2007, at the peak of the credit bubble only 50 institutions were regarded as problematic. In other words, the main institution overseeing our banking system and deposits had no clue at the apex of the bubble that a problem was imminent. Should we now be surprised that we are told that banking conditions are healthy while the above data tells us a very different story?
Too big to succeed
In the 1990s we had anywhere from 20 to 30 banks with total assets larger than $20 billion. At the peak of the crisis we had closer to 55 but today we are nearly back to 50. The too big to fail banks have gotten even bigger. This was always an interesting argument taken by the financial sector. We were told that too big to fail was part of the problem and caused a systemic meltdown. The solution? Make the too big to fail even bigger. So it is no surprise that while the middle class becomes smaller and pays for the bailouts this select group of banks become even bigger and more profitable. The list of giant banks is troubling:
Read more at My Budget360