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Friday, August 05, 2011

S&P Downgrades, Et Al

Update: The real meat in the S&P action, which was expected, is this statement:
The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
End update:

The administration is trying to make this look political, which is embarrassing because we are in such bad fiscal shape. Theoretically changing the ten-year deficit from 10 trillion to 8 trillion, with almost all the real cuts deferred to later years, is not exactly a "good first step". It's more like a middle finger to your creditors, ya know?

I mean, the post office is about to default, Fannie keeps showing up with its hand out for a few billion more, FHA probably needs a bailout, the US federal government is going to take some losses on the state and local bond issues it's been floating, the US is going to eventually have to write off maybe 30-45% of the student loans - our implicit debt keeps getting higher.

Our economic growth projections aren't that hot either, so it is not S&P that is the outlier. Moody's and Fitch will have to follow; the US is on a much faster downward slide than Italy ever was, and no one can pretend that we are not.

Here is Treasury Direct, Debt to the Penny. You will note that Debt Held By The Public suddenly jumped to 9.9 trillion, with total debt at 14.56 trillion. The new debt issues authorized basically take us already to the near-term extension of the debt limit (the legislation raised it in chunks). Treasury FMS is down currently, or I'd give you a link.

Even ABC News has noticed that, well, we already went to the near-term debt ceiling:
The nation’s official debt total was updated to reflect the “borrowing” we did during the May to August period from Federal worker retirement savings.

The new official national debt figure stands at $14,580,705,000,000 (14-trillion, 580-billion, 705-million dollars) as of the end of the day on Aug. 2.

The amount subject to the new debt limit is $14,532,332,000,000 – just $162 billion below the new limit Congress agreed to ($14.694 trillion).

Based on the average daily growth of the nation’s debt that gives us just 46 days of new borrowing before we rub up against the debt ceiling again. Of course, the compromise provided for up at least $2.1 trillion in debt limit increases in the coming years, so financial catastrophe isn’t right around the corner.
In fiscal terms, catastrophe IS just a couple years around the corner. The negotiated 2 trillion increase was just enough to take us past the 2012 election, and will run out probably before the new president is sworn in. We are planning to borrow 2 trillion more over the next year and a half. If total US nominal growth is 3% over that year and a half, our 15 trillion nominal economy (15,000 billion) will increase to a 15.45 trillion eonomy, in other words, will grow by 450 billion. And in the meantime our debt will go up by 2 trillion? Is this a plan?

I mean, we are contemplating jacking our Debt Held By The Public/Nominal GDP ratio up from 66% as of today to about 75% in a year and a half, and we have the BALLS to claim that credit ratings firms should maintain that we have a very low risk of default?

It sets new records for chutzpah. Watch this video. Among nations, the US is lot like the guy who's just "him":

MOM,i'm still a little stunned by the event even though we all knew it was coming. Theoretically, this should spike all bond yields along the curve and trigger forced liquidations of certain fixed income funds. The last leg of the financial reckoning has begun, and this is where things go FUBAR.

Wouldn't be surprised at all if expanded war accompanied us on this most treacherous journey.

Thanks for keeping it real MOM.
I surely hope not, but it is clear that right now the US is just rushing blindly to disaster.

While the US has little chance of regaining its AAA rating for 2-3 decades, this downgrade is survivable. However the next likely downgrade that S&P mentions is not; at that point our interest rates would skyrocket.
Bonus Link:

Instant view: U.S. loses AAA credit rating from S&P

"When you look at what has happened to other triple-A rated countries who have lost that rating it has tended to be a bullish period, which has been characterized by lower interest rates. That is more a factor of the broader economic expectations than it is of what the ratings agencies are saying."
We fiddle with paper, while Rome is burning. A couple of years from, it would seem silly that we ever worried about some inconsequential things like “downgrade” of paper. More pressing issues will come to fore.
I do want the safety net to work. I do believe there are people getting help that deserve it. That said, I'm afraid there are way too many getting help that are like the irresponsible, immature, dumby in the video.

The Federal government is too far removed from the recipients. Too easy to scam the system. Too hard to stop the gravy train when it is no longer needed. And there's the herd instinct. Old Joe down the street is getting gubmint dollars. If he gets it, then I deserve to get some of that free money too whether I need it or not - all I got to do is go sign up. And the agencies, like Social Security, look on all those applying as "customers." The more people they can sign up, the better their numbers look. Very little effort to detect or prevent fraud.

Since our debt problem is described as primarily being the so-called entitlements (60%), that is what is going to have to change and it is going to require a huge education program to get voters to understand what is at stake. Yesterday I read a column by John Mauldin, a financial guru, who is being consulted by a group of U.S. Senators as to how to deal with the crisis. They tell Mauldin that their mail and calls are running 10-1 against doing anything about SS, Medicare, and Medicaid. Yikes! That is a lot of stuck on stupid.

I liken it to the pension reductions forced on me and my fellow retirees after our company went bankrupt. There was a limited anmount of money in the pot. Better to take a 15% reduction now than see the pot go completely dry in ten years. Yet, how many understand that? No one wants to understand it, but SS, Medicare, and Medicaid are at the same point. Something has to be done now to keep paying out benefits over the years. Eventually, if nothing is done, no one will get anything even though they poured 15-20% of their earnings into the pot over a lifetime of work.

It looks like we are screwed because too many voters think there is an endless pot of money and will not allow any changes.

Don't know what a sovereign bankruptcy looks like, but assume it would work much like a corporate bankruptcy. Some super legal entity (the bankruptcy court) would split up the assets and dole out on a prorata basis. Few would be happy with the results, but it beats the heck out of a goose egg.

WV = chipshlo Ship slowly sinking?
Jimmy J, I saw that during the cheese giveaway during the Reagan years. Free cheese whether you need it or not! Who could resist?

Social Security is going to be the tough one and I think that we need to realize that the Boomers got the transition from pensions to 401ks. I think you have to cut them more slack than the folks that have always been in the 401k system. I also think that we have to totally get rid of these separate medical and pension systems for government workers. It leads to almost an aristocracy. Since government workers aren't in the same system as everyone else, they are clueless about how others have to manage health care and retirement. If it's good enough for us, it's good enough for them.

The question is, how to we ever wean them off it and move them into our system?

(verification word is whopp- as in let's whopp them down with a big stick!)
Teri says "we have to totally get rid of these separate medical and pension systems for government workers" and asks "how do we ever wean them off it and move them into our system?"

Maybe "wean" would take too long...

Perhaps this is the time, as Our Sublime Orator-in-Chief said recently, to "rip off the band-aid".

Uh-oh: word verif = progom
Mash-up between "governmental program" and and an out-and-out assault on the We-the-Taxpayers?
Teri says "we have to totally get rid of these separate medical and pension systems for government workers" and asks "how do we ever wean them off it and move them into our system?"

Maybe "wean" would take too long...

Perhaps this is the time, as Our Sublime Orator-in-Chief said recently, to "rip off the band-aid".

Uh-oh: word verif = progom
Mash-up between "governmental program" and and an out-and-out assault on the We-the-Taxpayers?
Aargh- sorry for double post- system took me to login page so I assumed (and we all know about "ass-u-me") that I had to hit "publish" again....
You're spot on about the separate and"unequal" government retirement and medical programs. I have a neighbor who worked for the Post Office for just long enough to qualify for their medical benefits.( About eight years I think.) He crows about how he doesn't have to worry about cuts to Medicare or the Medicare board that will ration care. He calls me a sucker for having believed the promises of a private corporation. It does Tee me off and we've had some SPIRITED discussions about the issues of the day.

Considering that Congress and the state legislatures have all put themselves in these programs, it is going to be really tough to change it.

Pitchforks and torches marching on D.C. might get their attention.

WV = carse Is it a curse on our economic outlook?
Large banks stocks have been taking a hit all year, rather clear sign that they will probably need another round of government handouts. This along with the probable downgrade of Fannie should put a fork in housing prices with the real possibility of housing becoming a cash market without continued federal underwriting. The banking sector and housing have relied on government intervention to survive, something that is getting lost in the current political drama.
I doubt housing will become a cash market, barring stupid new federal policies (granted, always a possibility). Homes are durable goods, it's relatively easy to recoup a bad loan secured by a home (as opposed to, say, auto loans or credit card debt), there's a long tradition at this point of long-term mortgages, and the Baby Boomers still hold enormous boatloads of cash and have a need for income-producing investments. These factors aren't going away. Maybe the 30-year mortgage could become rare, but not the shorter terms.
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