FedUpUSA

Archive for the ‘Credit Rating Agencies’ Category

Deal?  What deal?

Cut spending?  Uh, no.  There’s no spending cuts, only claims of reducted increases.  More debt?  Yes, and lots of it.  Balanced budget?  Never.

The economics are clear – unless this gets fixed, and soon, we will start down the gravity well inside the escape radius, and get to choose only between spiraling into the singularity and hitting it head-on.  Incidentally, both end the same way.

http://blogtalkradio.com/marketticker

I told you this was going to happen…… you have not heard this on bubble vision, but all you had to do was use your brain:

Q: “There’s been a figure of $4 trillion dollars circulating as an example of the scope of  fiscal consolidation measures that could work to stabilize the U.S. debt-gdp ratios. Could you explain how that figure was arrived at since it was mentioned in S&P’s reports and where it figures in S&P analysis?”

A: “First of all, that figure comes initially from the Bowles-Simpson fiscal commission, and it was embraced by President Obama  in his April 13 speech and Paul Ryan in his counter-budget proposal. And so you had policy makers converging around the amount. Now actually the $4 trillion, depending on whether it is front-loaded or back-loaded, is not going to do the trick in terms of stabilizing U.S. government debt-to GDP ratios. But it takes you pretty far along. And I think a grand bargain of that nature would signal, you know, the seriousness of policy makers to address the fiscal issues of the United States, to actually stabilize the debt-to-GDP. The IMF says it takes  7.5% of GDP consolidation. I think we have more than that.”

For perspective: That means cutting the deficit by more than one trillion dollars a year at present run rates.

And that’s not enough either.  GDP will contract dollar for dollar as the deficit spending comes off and taxes will contract too, which means that the actual cut in spending (or increase in taxes) will be have to more that one trillion a year.

It does not matter how that difference between revenues and spending comes off.  It does not matter if you cut spending, raise taxes or some combination of the two.  The GDP impact is inescapable as is the tax receipts impact.

But so, at this point, is the downgrade.

The “most-recent” proposals cut anywhere from nothing in actual spending (Democrat proposal) for 2012 to $90 billion (Republican.)  And neither contains any actual cuts on a forward basis – the Republicans are at least honest about it and say they just “hold discretionary non-defense spending at 2011 levels.”

That’s not a cut in spending.

So here’s how it’s going to go down.  We will get downgraded, probably within days or weeks after this “short-term” blip passes Congress, however it does.  And when we do, interest rates will ratchet, at least a bit.  If the Congress refuses to respond to that downgrade with real budget cuts including the cost of the increased interest now, which means they have to be another $100 billion or so (that is, 10% more than if they did it now) we’ll get downgraded after a period (probably six to twelve months) again.

Note: I’m talking one trillion a year in cuts and/or tax receipt (not rate) increases.

Not over ten years, per year.

Somewhere between now and that second move by the ratings agencies the market will figure it out and the squeeze will begin.

By then it will probably be too late for Congress to avoid the “coffin corner.”

The door is closing fast and we’re about to be left out in the cold.

I know this is claimed to be “politically impossible.”  But mathematics – specifically, exponents and subtraction – do not care about politics.  They just are.

They are determining this outcome, not politics, and those who are in Congress had damn well better wise up and start demanding from their advisors who say we can manage to muddle through strict proof – not a claim, but an examination of borrowing expense and tax receipts until they project an actual balanced budget, whenever that projection is for them. If the answer is “never” those people need to be tossed out of the nearest Capitol office building window – sans parachute.

Where does this take the stock market?  That depends on whether Congress responds before the downward spiral starts.  If they do the correction will be nasty, but we’ll get through it.  But if not…..

If what I heard today in the so-called “debate” on the floor of the House is an honest indication of what we can expect from Congress we’re just plain screwed.

I’m sorry.

Unfortunately the reaction overnight in the market makes clear exactly what is believed about the so-called “debt reduction” plans on both the left and right – that is, they’re lies.

The talking heads are all fawning over the fact that there is no “fear” represented in stocks.  Well that may be true and it may not, but it certainly isn’t when it comes to the dollar – down 0.6% with the decline being triggered by the Obama speech last night.

When all is said and done if this gets legs – and I suspect it will – we’re in big trouble.

You have about 2 cents – down to roughly 71.50 – before all-time low support is violated.  The premise that such a move will not come when, not if, the downgrade occurs is rather magical thinking, no?

The issue is not “avoiding a default” because no default is going to occur.  We have enough tax revenue to pay the interest due; ergo, there is no default.  What we’re actually arguing over here is when and how the “free stuff” folks will stop getting their 80 million checks (they mathematically can’t keep getting them on a forward basis.)

There are two choices:

1. We have an honest conversation and debate with the American people and determine both what we want in services from the government and pair each of those services with tax revenues that pay for the service in the present time. That which we refuse to pay for we cannot have.  Not by loading things onto tomorrow via borrowing, but by current tax revenues.  This will inevitably result in a ~15-20% reduction in GDP because that current GDP represented by the “hot checks” is false – it is being borrowed into existence so the government can “spread it around” without being able to fund it via current production in the economy.
2. We refuse to have that conversation and continue to play politics with the issue, promising people their 80 million checks when we know we don’t have the money to cash them.  This, incidentally, is a felony when you or I do it (writing rubber checks) but as with most things when Congress does it there’s no cop around to arrest the perpetrators and toss ‘em in the clink.  In this case the downgrades will come sequentially and borrowing costs will go up until we stop and we will not have the benefit of that debate.  Those costs will go up slowly at first, perhaps in an imperceptible fashion initially, but then, without warning, it will come all at once exactly as occurred in Greece, Iceland, Ireland and elsewhere.

There are many who argue that America is “exceptional” and that this can’t happen to us.  I assure you – it both can and will.  In fact it is a certainty should we choose path #2 over path #1, exactly as it is if you personally choose that path when your income is impaired and fail to find a new job.

There are many who say that a sovereign nation that controls its own currency cannot go bankrupt as it can simply print whatever it wants.  This is factually true but ridiculously and intentionally misleading.  While it is true that The Fed can “QE forever” to avoid a technical bankruptcy there is no avoiding the outcome.

Let us presume there are $10,000 in the world and there are also 10,000 bushels of corn.  That’s the entire economy.  In such an economy each bushel of corn has an imputed price of $1.

Now let’s “print” another $10,000.  There are now $20,000 and 10,000 bushels of corn.  It’s obvious to anyone who thinks about this for more than 5 seconds that each bushel of corn now costs $2.  The change in price is inevitable because the divisor has changed due to your act of printing more money.

While it is true that the United States can “technically” avoid bankruptcy the fact of the matter is that for you, I, Grandma and Grandpa that technicality has nothing to do with our reality.  Dilution of the monetary base – that is, changing the divisor – will inevitably show up in the prices you pay.  The purchasing power of your dollars will be debased, and due to the fact that we refuse to close our borders to unfair trade practices the value of your labor on the world market is free to fall to that of a subsistence farmer in India or China!

These are our choices folks.  Both outcomes are ugly, but the second is more ugly.  We have created a monstrously-distorted mess in our economy through the abuse of leverage on a serial basis and have spent the last 30 years lying to ourselves about alleged “economic growth” that never really happened.

Make no mistake folks – we’re in trouble, and lots of it.  But you wouldn’t know it from the people today, who are entirely-focused on whether Treasury coupon payments will get made next week.  That’s idiotic, as those payments will be made.  There’s more than enough tax revenue to cover it.

The real issue is the above debate and yet neither side of the political aisle will show up to have that debate with the public and resolve the underlying problem.

This is what our political parties are doing, and this is how it’s going to end.

The time to be prepared is now.

The Market-Ticker

Discussion (registration required to post)

Ok S&P, go ahead and do it.

President Barack Obama would veto a House Republican proposal to impose mandatory budget cuts and set caps for government spending in order to raise the federal debt limit, the administration said in a statement.

S&P made clear that if whatever the Congress and White House come up with does not result in at least $4 trillion in actual reduced deficits over the next 10 years – not games, not scams, not “creative accounting” but actual reductions they will downgrade the credit rating on the US.

Incidentally, that’s not enough; it’s only a reduction of about 25% in the deficit from the last three years’ levels, and with medical spending forecast to rise rapidly and dramatically within the next handful of years, a $400 billion/year cut off “baseline” won’t do jack.

In order for this to result in a sustainable budget circumstance GDP would have to be growing for the entire ten year and beyond period at roughly 8% annually.  That is not going to happen – that sort of “requirement” is pure magical thinking unmatched by reality at any time we have growth figures from (going back to the 1950s.)  Since 1990 the average has been 4.86% and since 2000 4.16%.  Expecting double that is idiotic.

S&P, to be blunt, is giving the government a pass – they’re not requiring sustainable deficits, but rather just enough slowing in the trajectory that we’ll manage to kick the can down the road for another five to ten years.

Yet our President has said he won’t even sign that, say something that fixes the problem.

Go ahead S&P, issue the downgrade this afternoon.

We’ve earned it.

Debt must never, ever grow faster than GDP does, whether that debt is in a given sector (e.g. government, consumer, financial, etc) or in the nation as a whole.

For decades, the U.S. government has had a AAA rating.  On the scales used by the big three credit rating agencies, that is the highest credit rating that a government can get.  Moody’s scale actually uses lettering that is a little different from the other two big agencies (“Aaa” instead of  “AAA”), but you get the point. Right now, the U.S. government is closer than ever to losing its AAA rating.  The threat of a rating downgrade is going to continue to grow regardless of how the political theater that we are watching unfold in Washington D.C. plays out.   The truth is that the federal government has accumulated a debt that is so vast that it will never be paid back.  In fact, we are rapidly approaching the point when this debt will no longer be serviceable.  If the credit rating of the U.S. government is not slashed right now, it will be soon enough.  In fact, the truth is that the U.S. government is such a financial mess that it should have been done long ago.  But whenever the United States does lose its AAA rating, we could potentially see financial hell unleashed because it will also mean that there will almost certainly be a wave of credit rating downgrades from coast to coast.

As I have written about previously, government debt becomes more painful the higher that interest rates go.  When the big credit agencies downgrade the credit rating of a government, that is a signal to investors that they should ask for higher interest rates on debt issued by that government.

This does not always play out in practice (just look at Japan), but nations such as Greece, Portugal and Ireland sure are going through financial hell right now as they deal with reduced credit ratings and soaring interest rates.

Right now, the U.S. government is able to borrow gigantic quantities of money at ridiculously low interest rates. This is the primary reason why the debt disaster predicted by so many in the past has not arrived yet.

If the credit rating of the U.S. government is downgraded, it could finally get investors all over the world to realize that the game is over and that they should be demanding much higher returns on debt issued by the U.S. government.  The truth, as U.S. Representative Ron Paul put it recently, is that the U.S. government is already “insolvent” and at some point we are all going to have to face reality….

“Ultimately, the fundamentals show this country is bankrupt.”

So whether or not it happens right now, the truth is that at some point the credit rating of the U.S. government is going to go down and interest rates are going to go up.

Unfortunately, it appears that this might happen sooner rather than later.

Earlier this week, Moody’s Investors Service publicly announced that it would be reviewing our Aaa bond rating for a possible downgrade.

On Thursday, S&P actually went so far as to announce that there is a “50 percent chance” that it will downgrade the credit rating of the U.S. government within the next three months.

S&P has been warning of trouble for some time now.  Back on April 18th, Standard & Poor’s altered its outlook on U.S. government debt from “stable” to “negative” and warned that a downgrade was likely at some point soon if nothing changed.

If the credit rating of the U.S. government gets slashed and if that results in higher interest costs on the national debt, that is going to make it much harder to balance the budget.

The U.S. government will take in somewhere around 2.2 or 2.3 trillion dollars this year.  It will spend somewhere in the neighborhood of 3.5 or 3.6 trillion dollars this year.

Included in that spending is about 400 billion dollars that goes for interest on the national debt.

As I explained in a previous article, if our interest costs double or triple it is going to make it basically impossible to balance the budget under our current system.

If interest rates on U.S. government debt were to rise to moderate levels, we could soon be easily paying a trillion dollars a year just in interest on the national debt.

If interest rates on U.S. government debt were to rise to the levels that Greece, Portugal and Ireland are now facing, it would be beyond catastrophic.

But a reduced credit rating and higher interest rates would not just hurt the finances of the U.S. government.

Any financial institution that is linked to the U.S. government in any way would also probably be downgraded.

This fact was noted in the announcement put out by Moody’s this week….

In conjunction with this action, Moody’s has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks.

We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the government or the affected financial institutions.

Just think of the financial carnage that would cause.

Also, check out what one Bloomberg article had to say about the potential cascading effects of a credit rating downgrade for the U.S. government….

At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.

An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action.

But the nightmare would not end there.  The truth is that the credit ratings of large numbers of state and local governments from coast to coast would likely be reviewed and downgraded as well.  Right now, many state and local governments are scratching and clawing in a desperate attempt to survive financially, and a significant rise in interest costs would be enough to wipe many of them out.

The ripple effects of a U.S. government credit downgrade would be endless.

A lot of people argue that if the federal government ran a balanced budget from now on none of this would matter.

Unfortunately, that is not true.

At this point, a very high percentage of U.S. government debt is short-term debt.  That means that gigantic amounts of debt must be “rolled over” each year in addition to any new debt that we take on.  So even if interest rates rise significantly on just the existing debt that we have it is going to be a total nightmare.

And make no mistake, whether it happens now or later a collapse of U.S. government finances is coming.

David Murrin, the chief investment officer at Emergent Asset Management, recently told CNBC the following….

“It’s inevitable that the U.S. will default—it’s essentially an empire which is overextended and in decline—and that its financial system will go with it”

Right now it is being projected that the U.S. national debt will hit 344% of GDP by the year 2050 if we continue on our current course.  We are on a runaway train that is heading straight for a brick wall.

Europe is also a complete financial wreck.  The sovereign debt crisis over in the EU continues to grow worse by the day and there is no end in sight.

If the U.S. collapses, Europe is not strong enough to save it.  If Europe collapses, the U.S. is not strong enough to save it.

We really are entering an unprecedented time in world history.   We are on the verge of the first truly global financial disaster.

It is going to be interesting to see which major currency crashes and burns first.  Some think that it will be the euro.  Others think that it will be the dollar.

In any event, the reality is that the current global financial system is not sustainable.  The folks that are in charge can try to keep things together for as long as possible, but at some point the dominoes are going to start to fall and the house of cards is going to crash.

We have entered a time when there is going to be financial crisis after financial crisis.  Even if the EU and the U.S. government can somehow fix things for the moment, more problems are going to be just around the corner.

The world has become incredibly unstable and the entire globe is going to be shaken.  Most people cannot even conceive of the kind of financial hell that is coming our way as a nation.

Yes, it can be a bit sad to think about what is happening, but it is much better to be armed with the truth than to be totally clueless and totally unprepared.

The Economic Collapse