Democrats & Liberals Archives

Is A U.S. Credit Downgrade Inevitable?

With the debt negotiations still looking more like a hostage situation than anything else, today the media is already spreading the idea that it may be too late to avoid a credit downgrade even if our leaders come to a solution before August 2nd.

From Daily Beast:

Some analysts have given up hope for the U.S. maintaining its rating. “We’re at a point that the odds of having a downgrade make it pretty much inevitable,” says Peter Cohan, a financial analyst and head of venture capital firm Peter S. Cohan and Associates. "I see a downgrade as being inevitable. The question is whether markets see that as being significant."

Ironic, isn't it? The GOP and it's base have run around for a year or more incorrectly suggesting instability and lack of confidence are preventing a stronger recovery. Now the Republican ideologically stubborn line in the sand is creating those conditions for real. Nothing builds market stability and confidence like a downgrade in US credit, I say.

EconBrowser has an interesting comparison of the delusions of the right over the debt ceiling to the delusions of those who lead us to World War I. Here is the outline of the delusions:

1. Certain individuals believe the debt default would be temporary (or "technical"), lasting until the politicians come to their senses (Pawlenty, Ryan) or can be avoided by selectively defaulting on only non-debt payments (Bachmann, Gohmert)

2. Certain individuals think the effects of the default would be short lived and minimal.

3. Certain individuals think that the rest of the world (including holders of US Treasurys, like PBoC) will not react to a default, and the policy paralysis evidenced by this event.

Chinn believes what might result from these delusions is a prolonged and costly crisis for the US and the world similar to how delusions about WW I lead to a costly and prolonged conflict.

Meanwhile, in other fantastic news, CBPP on Speaker Boehner’s New Budget Proposal:

House Speaker John Boehner’s new budget proposal would require deep cuts in the years immediately ahead in Social Security and Medicare benefits for current retirees, the repeal of health reform’s coverage expansions, or wholesale evisceration of basic assistance programs for vulnerable Americans.

The plan is, thus, tantamount to a form of “class warfare.” If enacted, it could well produce the greatest increase in poverty and hardship produced by any law in modern U.S. history.

That's more irony right there. Democrats want to raise taxes on the wealthiest Americans and the GOP calls it class warfare. I guess the GOP just doesn't count the peasant class when it comes to defining class warfare. It's only Tuesday and it's looking like a long week.

Posted by Adam Ducker at July 26, 2011 7:54 AM
Comments
Comment #326476

I’m not sure if it will downgrade our credit rating; but perhaps a downgrade is necessary for politicians of both parties to finally get the spending under control. Other than that, I don’t trust the hype or calling our situation a crisis.

Posted by: JohnQpublic at July 26, 2011 9:36 AM
Comment #326477

JohnQpublic:

A downgrade would be costly and painful. Our spending issues in the US are not such a large problem that a downgrade would actually be a beneficial thing. If there is one thing that is hyped it’s the problem of our deficit. Job creation is a much bigger problem having nothing to do with our debt.

Posted by: Adam Ducker at July 26, 2011 9:55 AM
Comment #326480

Adam,

“Job creation is a much bigger problem having nothing to do with our debt.”

Well, it actually does. The fact that job creation has been divorced from discussions of the debt problem is a huge mistake. An economy with full employment would generate substantially more tax revenue relieving the deficit and debt problem. It would also reduce outlays for food stamps, Medicaid, unemployment insurance, etc. It would be an enormous factor in addressing the short and long term fiscal problems of the public sector. In addition, tax increases would not be such an onerous prospect if job opportunities and wages were growing.

The fact that conservative tea party types have been able to de-couple the job creation and economic issues from the deficit debate is unbelievable to me. Where is the push back by liberals and the media? The future economy is the most important and unknown wild card in this debt debate. Being sucked into this austerity discussion during depressed economic times plays into the hands of those wishing to dismantle the social safety net of the US.

Posted by: Rich at July 26, 2011 11:24 AM
Comment #326482

Adam,
Another idea being spread by the media is that the credit agencies need to see spending cuts in order to maintain an AAA rating. That is incorrect. The agencies are about a the ability and willingness to pay debts. The AAA rating could be maintained by keeping spending the same and raising the tax rates for the wealthy to 70%. There seems to be a strange inability for the public to remember, the equation for debt and deficit involves revenue and spending.

I don’t think the debt will be downgraded. To let that happen would be extraordinarily foolish.

We’re seeing a negotiation. Both sides will use the August 2nd deadline to increase pressure. In the meantime, nothing is agreed to until everything is agreed to, so maintain a cool head. Factions will float various proposals. It’s just playing to the audience and ramping up the pressure, and it will make many very uncomfortable as the deadline nears.

Rich,
Well said. The point is to restore a healthy economy, and the best way to do that is to concentrate on job creation. Fixating on debt and deficits misses the point of the exercise. But of course, that is the point of the exercise for the GOP. They want to destroy Social Security, Medicare, and the rest of the safety net, and that is why they only discuss spending cuts for so-called entitlements, rather than raising revenues or cutting spending on the military. It’s a despicable exercise in class warfare.

Posted by: phx8 at July 26, 2011 11:48 AM
Comment #326484

Rich:

I agree completely. What I should have said is that the debt is not necessarily holding back job growth and therefore any debt crisis is hyped. I certainly agree that jobs are important to long term reduction of debt.

Phx8:

I agree with you as well. That we’ve been saddled with the majority of this debt through policies pushed for, supported, and voted on by the very same Republicans who are now using a “debt crisis” as a way to further their own agenda is something we all need to repeat over and over until we’re blue in the face.

They blame the Democrats for the spending that belongs to them that is only now a big problem because the debt was amplified by the recession that also happened on their watch.

I have a conservative friend that tells me, “Everything was fine until the Democrats took over Congress in 2006 and ran the economy into the ditch!” This level of delusion borders on outright madness.

Posted by: Adam Ducker at July 26, 2011 12:08 PM
Comment #326485

Phx8: “It’s just playing to the audience and ramping up the pressure, and it will make many very uncomfortable as the deadline nears.”

I felt cool headed last week. This week I’m definitely getting uncomfortable.

Posted by: Adam Ducker at July 26, 2011 12:10 PM
Comment #326491

I think the simple answer is yes, we are going to get downgraded, regardless of what happens in Congress. The reason is simple. S&P and Moody’s have both said that the reason we’re being reviewed is not because of the debt or the debt ceiling, it’s because our debt as a percentage of GDP is growing without any signs of stopping. Because Congress refuses to cap spending and balance the budget, there will almost certainly be a downgrade because our legislators refuse to “stop the bleeding”.

Ultimately, it’s not about the debt. It’s because we don’t have a plan to put the brakes on it.

Posted by: Kevin Nye at July 26, 2011 1:30 PM
Comment #326495

Kevin,
No. Sorry. You are wrong. Flat wrong. The credit agencies are reviewing US debt because there is a possibility of missing a payment on notes and bonds, due to the debt ceiling not being raised. It’s that simple. It has NOTHING to do with the size of debt or the rate of growth. That is wrong.

Where did your information come from? I would really like to know!

Posted by: phx8 at July 26, 2011 2:08 PM
Comment #326496


Before we can say that it is “just playing up to the audience and ramping up the pressure,” We have to look for and examine motives for why some would wish for default and claim that it wont be as serious as some claim. There are motives and there is an agenda.

Posted by: jlw at July 26, 2011 2:26 PM
Comment #326502

jlw,
Obama has always had the same agenda: increase the debt ceiling, and push the next one past the upcoming election. The far right has always had the same agenda: kill Social Security and Medicare, and lower taxes for corportions and the richest of the rich in the name of ‘freedom.’

As anyone with a memory knows, GOP conservatives were silent during the run-up of the debt prior to Obama. Their interest in the debt & deficits is utterly disingenuous. Addessing the problem would mean increasing revenues and decreasing spending. It’s very simple. The actions of Congress in 1993-94, when they raised taxes, provides a good example of what will happen with tax increases and spending cuts: an economic boom, a balanced budget, and a ten-year projection of a $10 trillion surplus.

Notice how conservatives never mention this? It doesn’t fit their agenda. They never truly cared about reducing debt, because what they really want is to kill ‘entitlement’ spending.

And perhaps their chief motive is to make sure Obama is defeated in 2012. No price is too steep, not even the economic destruction of the country, if it increases their power.

Posted by: phx8 at July 26, 2011 3:35 PM
Comment #326505

Kevin Nye-
If that were true, they would have lowered our rating long ago. The primary concern they have is the political situation.

Who created the political situation? Who decided that taking the debt ceiling hostage was a bright idea? The irony here is, Republicans are likely to make paying off our debt harder, not easier, by pulling any such stunt.

Posted by: Stephen Daugherty at July 26, 2011 4:14 PM
Comment #326522

On the subject of the credit agencies and possible downgrades, here is the conclusion from Moody’s notice:

“While the debt limit has been raised numerous times in the past, and sometimes the issue has been contentious, bond interest and principal have always been paid on time. If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction. To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.

Moody’s does not take a position on what measures should be included in any deficit reduction package. Instead, it is the resultant deficit and debt trajectories that are relevant to the rating and its outlook.

So Kevin, your comment is completely wrong, as I earlier stated, since the credit agencies do eventually want to see something done about decreasing debt. However, the agencies do not care whether eventually changing the trajectory involves tax increases, spending cuts, or balanced budgets.

Posted by: phx8 at July 26, 2011 6:59 PM
Comment #326530

phx8

Why not quote the entire message? You left out the part that they say spending must be cut.

Should have left the cherry pickin’ to Geo. Washington.

Posted by: tom humes at July 26, 2011 7:47 PM
Comment #326544

Tom,
Here is the link:

http://blogs.wsj.com/marketbeat/2011/07/13/moodys-puts-us-on-review-for-possible-downgrade/

I’m not seeing anything that says spending needs to be cut. “Deficit reduction” can involve spending cuts or revenue increases. All that matters is the net result. For example, we could actually increase spending and then increase taxes by a greater amount, and that would meet Moody’s criteria for reducing the deficit.

Posted by: phx8 at July 26, 2011 9:29 PM
Comment #326558

phx8


“For example, we could actually increase spending and then increase taxes by a greater amount,”


yes let’s increase the tax burden on the american people who are already having a tough time making ends meet. and we’ll do it all in the name of creating an even bigger, and more intrusive overbloated gov’t. BRILLIANT IDEA!!!! oh wait……..we can just stick it to those evil rich people and………corporate jet owners……ya…that’s it. LOL!!!!!

Posted by: dbs at July 27, 2011 5:31 AM
Comment #326565

dbs,
You are missing the point. People like Tom are so locked into a frame, they cannot see the big picture. When Moody’s uses the phrase “deficit reduction,” some people cannot see outside the frame, and believe that can only mean spending cuts. It does not. As an example, I pointed out that as long as taxes are increased more than spending, the deficit trajectory would trend downward, thereby satisfying the concerns of the rating agencies.

No one is proposing it… But in fact, I would like to see spending cuts in the form of withdrawals from Iraq and especially Afghanistan, and comletely phasing out the Marine Corps; doing away with the cap on Social Security; and restoring the Clinton era tax rates. Doing this would substantially shrink the deficit, allow the SS retirement age to be fully funded and LOWERED, and more. After a few years, there would be a HUGE reduction in debt, allowing education to be publicly funded for all who qualify through college.

Posted by: phx8 at July 27, 2011 12:12 PM
Comment #326573

phx8

Look at the history of tax increases. Every time there are tax increases, congress spends more. And they have to borrow more to meet the spending they just did. That is a fact and is simple to assimilate.

Posted by: tom humes at July 27, 2011 1:33 PM
Comment #326574

Phx8,

This comes directly from S&P:


The CreditWatch action reflects our view of two separate but related issues. The first issue is the continuing failure to raise the U.S. government debt ceiling so as to ensure that the government will be able to continue to make scheduled payments on its debt obligations. The second pertains to our current view of the likelihood that Congress and the Administration will agree upon a credible, medium-term fiscal consolidation plan in the foreseeable future. - Source

and a quote:


“For us, the issue is not the debt limit — it’s the underlying fiscal dynamics,” said Beers, who has been rating governments for the company for 20 years. “It’s not obvious to us that this political divide that is proving so difficult to bridge is going to be any more bridgeable three months from now or six months from now or a year from now.” - Source

It’s ultimately about the ability of the Government to pay its obligations. The debt limit, by itself, does not immediately impact that because we still have enough money coming in to pay our debt, social security, medicare/medicaid, military/veterans and more. We won’t be able to keep all the Government programs going, but in a crisis situation, we could pay for the things that would be considered a default if we didn’t. No, it wouldn’t be pretty, but we could still meet our obligations. The downgrade is being considered because our path us unsustainable and we haven’t done anything to correct course.

Stephen,


If that were true, they would have lowered our rating long ago.

They probably should have.

Who created the political situation? Who decided that taking the debt ceiling hostage was a bright idea? The irony here is, Republicans are likely to make paying off our debt harder, not easier, by pulling any such stunt.

Pointing fingers doesn’t solve problems. Blaming the other party only means that you have no plan of your own. Both parties are at fault. They have both engaged in poor fiscal policy for decades. At least one of them is finally realizing that we have to stop what we’re doing. Using the debt ceiling to force a change in policy is an unfortunate but necessary step. Without that as leverage, the Senate and White House will not make any efforts to curb spending.

If not raising the debt ceiling means that we can’t pay our bills, isn’t that a pretty clear indication that we’re already in over our heads? If we weren’t, why would we have to borrow money to keep our creditors at bay?

This is not a partisan issue unless we choose to make it one. This is pure dollars and cents (common sense, for that matter).

Posted by: Kevin Nye at July 27, 2011 1:34 PM
Comment #326576

Phx8,

So Kevin, your comment is completely wrong, as I earlier stated, since the credit agencies do eventually want to see something done about decreasing debt. However, the agencies do not care whether eventually changing the trajectory involves tax increases, spending cuts, or balanced budgets.

I never said that they took a position on how the deficit reduction was achieved. What I said was “Ultimately, it’s not about the debt. It’s because we don’t have a plan to put the brakes on it.”

To use your quote (emphasis added):


However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction. To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.

Wow. Sounds an awful lot like they want a plan. Where have I heard that before?

Posted by: Kevin Nye at July 27, 2011 1:45 PM
Comment #326582

Correction,
My sentence should have read: “your comment is NOT completely wrong.” My bad. My apologies.

Posted by: phx8 at July 27, 2011 2:42 PM
Comment #326592

“Look at the history of tax increases. Every time there are tax increases, congress spends more.”

Tom,

When was the last tax increase? When was the last significant reduction in government expenditures? The answer to both questions is 1993 when the Clinton Deficit Reduction Act was passed by a Democratic Congress with not one Republican vote. It provided for a five year planned reduction in government expenditures across the board in addition to a tax increase primarily effecting upper income brackets.

It worked. Government expansion decreased. Revenues surged. The deficit was dramatically reduced and beginning in 1999, the government actually posted a surplus for a few years. The economy boomed.

I am not suggesting that the Clinton plan would be appropriate for today’s economic circumstances, just to point out that tax increases have not always resulted in Congress spending more.

Posted by: Rich at July 27, 2011 5:26 PM
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