In what appears to be an attempt to influence the political debate in Washington over federal government deficits, Standards & Poor’s rating firm downgraded U.S. debt to negative from stable. Yes, the raters who blessed virtually every toxic waste subprime security they saw with AAA ratings now see problems with sovereign government debt.
The best thing to do is to ignore the raters — as markets usually do when sovereign debt gets downgraded — but this time stock indexes fell, probably because of the uncertain prospects concerning government budgeting. After all, we barely avoided a government shutdown earlier this month, and with S&P. joining the fray who knows whether the government will continue to pay its bills?
Mind you, this has nothing to do with economics, government solvency or involuntary default. A sovereign government can always make payments as they come due by crediting bank accounts — something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks.
Similarly Chairman Alan Greenspan said that Social Security can never go broke because government can meet all its obligations by “creating money.”
Instead, sovereign government spending is constrained by budgeting procedure and by Congressionally imposed debt limits. In other words, by self-imposed constraints rather than by market constraints.
Government needs to be concerned about pressures on inflation and the exchange rate should its spending become excessive. And it should avoid “crowding out” private initiative by moving too many resources to our public sector. However, with high unemployment and idle plant and equipment, no one can reasonably argue that these dangers are imminent.
Strangely enough, the ratings agencies recognized long ago that sovereign currency-issuing governments do not really face solvency constraints. A decade ago Moody’s downgraded Japan to Aaa3, generating a sharp reaction from the government. The raters back-tracked and said they were not rating ability to pay, but rather the prospects for inflation and currency depreciation. After 10 more years of running deficits, Japan’s debt-to-gross-domestic-product ratio is 200 percent, it borrows at nearly zero interest rates, it makes every payment that comes due, its yen remains strong and deflation reigns.
While I certainly hope we do not repeat Japan’s economic experience of the past two decades, I think the impact of downgrades by raters of U.S. sovereign debt will have a similar impact here: zip.
By: L. Randall Wray, The New York Times, April 18, 2011
April 19, 2011
Posted by raemd95 |
Bankruptcy, Banks, Congress, Debt Ceiling, Debt Crisis, Deficits, Economic Recovery, Economy, Federal Budget, Financial Institutions, Financial Reform, Government, Government Shut Down, Ideology, Politics, Social Security, Standard and Poor's | Ben Bernanke, Debt, Debt Limit, Defaults, Financial Ratings, Inflation, Japan, Markets, Solvency, Sovereign Governments, Stocks, Subprime Securities |
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What does Standard & Poor’s action lowering the U.S. outlook to “negative” mean? What are the likely ramifications of the U.S. deficit and debt? I do not want to conflate two completely different issues, so let’s take each in turn.
First, I have stopped paying any attention to anything that S&P says or does. Its performance over the past decade has revealed it to be incompetent and corrupt – it sold its AAA ratings to the highest bidder. It is the broker who lost all your money, the girlfriend who cheated on you, the partner who stole from you. Since the portfolios we run never rely on its judgment or analysis, we simply do not care what it says about credit ratings.
But big bond managers like Bill Gross of Pimco do matter – he invests hundreds of billions of dollars. We pay close attention when smart managers like him announce they are out of the Treasury market, which he did last month.
Many people misunderstand the U.S. deficit. First, it is stimulative to both the economy and the markets. Look at what happened under Reagan and Obama and most of Bush II – the economy recovered from recession and the markets rose along with the deficit.
Second, Social Security is fine. Sure, the retirement age will go higher, there will be means testing, and the income cutoff for contributions ($106,000) will likely double. But it will remain solvent. Medicare is much trickier, as the United States pays two times what most countries pay for health care but gets lesser care.
The current debate about deficits looks like more politics. Look at the voting records of those posturing about the debt. The “deficit peacocks” voted for new entitlements (the prescription drug benefit — Medicare Part D), went along with a trillion-dollar war of choice in Iraq, and supported (for the first time in U.S. history) a major tax cut during wartime. I find it hard to take their deficit noise as a bona fide fiscal concern.
After Standard & Poor’s missed the greatest collapse in history – indeed, they helped create it by rating junk mortgage backed securities Triple AAA – they are now over-compensating. As I mentioned on The Big Picture, there is an old Wall Street joke about analysts: “You don’t need them in a Bull Market, and you don’t want them in a Bear Market.” That especially seems apt with regard to S&P.
The deficit has been with us for a long time. Since investors are continuing to lend money to Uncle Sam at exceedingly low rates, there does not appear to be any real fear of a default. That is what matters most to bond buyers — and it’s why I never care what S&P thinks on this.
By: Barry Ritholtz, The New York Times, April 18, 2011
April 19, 2011
Posted by raemd95 |
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The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer.
The Standard & Poor’s rating firm should be embarrassed. If there is any political judgment at work here, it is S&P. falling for politically motivated scare mongering. But given its track record with mortgage securities and collateralized debt obligations, why should we be surprised to see a rating agency relying on conventional wisdom rather than analysis?
The whole premise of the rating is incorrect. The U.S. may eventually experience unacceptable levels of inflation, but the experience of Japan shows that stop-and-start fiscal stimulus is more likely to result in protracted near-term deflation.
Every time Japan tried to lower its public-debt-to-gross-domestic-product ratio by cutting spending, the resulting drop in economic activity actually made that ratio worse. We are seeing the same results in Ireland and Latvia. The United Kingdom tried the same experiment 10 times in the last 100 years, and every time it got the same results: cutting spending to reduce budget deficits results in a fall in G.D.P. that makes the debt burden worse, not better.
The remedy should be to get private sector debt loads down via encouraging debt restructuring and write-offs, and using well targeted fiscal stimulus to offset the impact of those efforts. But S&P instead would have us do the economic equivalent of trying to cure an infection by using leeches.
Misguided cures killed a lot of patients and are killing a lot of economies.
By: Yves Smith, Writer for Naked Capitalism. Original article appeared in The New York Times, April 18, 2011
April 19, 2011
Posted by raemd95 |
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OK, this is the day everyone hates. You have to pay your taxes. Who wants to write that check? Nobody, probably.
The truth, however, is that Rep. Paul Ryan, the Tea Party, and most politicians are not being honest when they tell us there is no revenue problem, only a spending problem.
The Associated Press reports today that an IRS analysis tells us that 45 percent of Americans will pay no federal income taxes for 2010. Plus, the 400 Americans with the highest adjusted gross incomes averaged $345 million for the year. Their average federal income tax rate was 17 percent, down from 26 percent in 1992. Wow, and they need another tax break?!
This confirms the Warren Buffett line that his secretary pays a higher percentage of her income in taxes than he does.
But here is our problem: We cannot come close to dealing with this deficit unless we both cut spending and raise revenue. We certainly won’t accomplish anything unless we deal with the tax problem and reform our tax code.
I firmly believe that every American who works or gets income should pay something in federal taxes. Even if it is a small amount. This by itself won’t do much to dent the deficit, but it would be important as a symbol that everyone is in this together. Second, and most important, the gap between rich and poor and the middle class is widening in this country. Those who earn over a million dollars did not deserve an average tax cut of $120,000 under George Bush; they certainly don’t need that raised to $200,000 under the Ryan plan.
We need to recognize that the richest 2 percent of Americans should pay more, but we also need to make this tax system make sense. How can you have a society where nearly half the income earners pay no income taxes, due to deductions, loopholes, and special deals?
I am not arguing that struggling families should be hit with a whooping tax bill, but, rather, that our politicians should be honest with the American people. If you are fighting two wars, you have to pay for them. If you have to save the car companies and our financial institutions, you have to pay, at least initially. If you are going to provide Medicare, Medicaid, Social Security, education, bridges, roads, and air traffic controllers, for that matter, you have to have the revenue.
It is just plain dishonest to put forth a budget and a plan that says “we have no revenue problem.” That is modern snake oil. It is time that we dealt with our tax problem, otherwise we won’t really be dealing with our deficit at all.
By: Peter Fenn, U.S. News and World Report, April 18, 2011
April 18, 2011
Posted by raemd95 |
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In case you didn’t notice, today is Tax Day, which means it’s also the second anniversary of one of the tea party movement’s biggest moments, April 15, 2009, when dozens, if not hundreds, of well-attended protests were held around the country.
It was a coming-out party of sorts for the movement. No one really knew what the tea party was at that point, and, as momentum built toward the Tax Day rallies, details began to emerge regarding just who they were, and who was organizing them.
Today, the movement seems to be dwindling.
Tax Day, 2011, came and has largely gone without the same kind of massive, irate throngs in every state and major city. We can attribute that, to some degree, to the scheduling shift of Tax Day to April 18 and the movement’s consequent dispersed focus, holding rallies on Friday, Monday, and over the weekend, rather than on just a single day. But you can’t deny that, as an activist movement, the tea party has lost some momentum, attendance-wise.
A Michele Bachmann rally in South Carolina Monday drew a measly 300 people. A few weeks ago, maybe a couple hundred showed up to a Capitol Hill protests held by Tea Party Patriots, the nation’s largest tea party membership group, which once estimated its membership at over 15 million. It was hard to tell how many were there to participate and how many were there to spectate and the tea partiers were almost outnumbered by the reporters.
A Virginia tea party activist told me recently that members of his group are spread too thin. “We’re kind of saturated right now,” he said, explaining that different people and groups ask them to do too many things. He showed me a few of the emails sent around to members, asking various things of them. It’s a problem, he said.
As the activist infrastructure has built up, so have the demands on individual activists. With the initial fervor wearing off, it makes for a tired bunch of crusaders.
And yet the tea party seems to have accomplished its main goal: bending the will of the Republican Party.
Republican politicians widely cater messages and platforms to a tea party audience. Listening to what is said by Republican presidential contenders, House members, and candidates for office, it’s tough to argue the tea party hasn’t left its mark. It’s taboo not to talk about drastic cuts to federal spending, whether or not one has a plan for the specifics.
During the midterms, Republican candidates met with tea party groups, seeking their approval. It became impossible to distinguish a “tea party” candidate from a regular Republican.
That effect has carried over into 2012. The Tea Party Express will partner with CNN to host a GOP presidential debate, and the movement’s influence will finally be institutionalized in the 2012 primary contest.
Perhaps most significantly, Washington is now engaged in a serious discussion of how to reduce spending levels over the long term. While President Obama rejected the House GOP’s drastic 2012 budget proposal out of hand, it’s safe to say he was forced by November’s results and the tea-party-fueled GOP House takeover to propose a big number, $4 trillion, of cuts from the deficit over the next 12 years.
The tea party movement can legitimately take some credit for that. We’ll find out, as the 2012 election approaches, just how much gas is left in the tea party’s tank. It’s likely that the GOP 2012 contest and the tea party’s rallies will blend into one continuous political event, with candidates taking turns on stage and with lots of people turning out.
But the movement is in an ironic place now. Without an election this year and with attendance tapering off, it’s also become institutionalized as a fixture in American politics, having possibly swayed enough 2012 candidates to preempt the presidential primary from even being a flashpoint in the GOP’s identity.
Apparently what we’re seeing now is what victory looks like.
By: Chris Good, The Atlantic, April 18, 2011
April 18, 2011
Posted by raemd95 |
Congress, Conservatives, Deficits, Economy, Elections, GOP, Government, Ideologues, Ideology, Liberty, Media, Politics, President Obama, Republicans, States, Taxes, Tea Party, Voters | Activists, CNN, Debates, Federal Spending, Michele Bachmann, Republican Party, Tax cuts, Tax Day, Tax Day Rallies, Tea Party Express, Tea Party Membership |
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