Thursday, July 14, 2011

Moody's warns Congress; so does Standard and Poor's (but more gently); Balanced Budget amendment, temper tantrums, and more

Moody’s Investor Service announced on July 13 that it was placing the bond rating for the United States, now at “Aaa” on review.  The most comprehensive link, open to the public, of the action is (website url) here.
    
Moody’s says it offers no opinion on specifically what spending cuts should be made, but that it sees two basic dangers: first a default on the bond obligation if the debt limit is not raised by Congress on time, and then an unconvincing case that it will be able to control spending in the future.

It suggests that a default would probably be short-lived with restoration of payments, but the result could be a permanently lowered rating.  To quote the paper, “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.

Standard and Poor’s “Credit Matters TV” has an interview with Paul Coughlin, from London, on the effect of a possible failure to raise the debt limit. The link is here.The scenario is not as alarming as painted by the US media.   It says that the debt limit has been raised 78 times since 1960.  He says some bonds could be “rolled over”. 

However, Standard and Poor’s (aka "Standard & Poor's")  has been reported by the WSJ as having said that even if the government makes all its bond interest payments but misses social security or veterans’ payments (or is just late with them), it would probably drop the US government’s rating.

A variety of convoluted short-term solutions are appearing, such as a variation of McConnell’s that would require Congress to provide some rough draft’s of spending plans. All of these are designed to reduce the “political” damage, especially to Republicans who promised things they can’t deliver to constituents based on ideological grounds.

One particularly interesting variation calls for the House to vote on a Balanced Budget Amendment by Aug 2. There are some escape hatches to the amendment that allow Congress to override the balancing by super-majorities. Bailouts, TARP, and the rescue of GM would not longer be possible, and investors would be at the mercy of the next derivatives scam or the next AIG.  Even deposit insurance could come into question. People might turn to gold, which can be shady.  (I remember a deal to sell two krugerands back in 1985.)

It still seems to me that both sides need to be specific as to what they will cut and how quickly. It’s apparent that many cuts would not hurt ordinary consumers – such as pork projects, military contractor abuse, and particularly drug enforcement.  I wonder how much making marijuana illegal costs the federal government every year, compared to other needs including “entitlements”. 
But there are real questions on “entitlements”, even for current beneficiaries, and I have written that anyone receiving them should know the “value” of his own (or family’s) past contributions through FICA and Medicare taxes.  The idea of scaling back entitlements for future generations by quasi-privatization and ownership makes sense if done right, but this may not be convincing enough; the current beneficiaries still represent an issue because longevity in increasing so rapidly, as is use of medical services and the projection for much more long term disability in the future (as with Alzheimer’s).  Legal pressures for filial responsibility on other family members could increase, and this could hit the childless particularly hard.  The “right” has a point when bringing up “demographic winter”.

The Washington Post online has an “amusing” chart on “You choose: who gets paid (and who doesn’t)?”  The link is here. Read it this way: it sounds like bringing back the era of the playground bullies:  Who is “it”?  Who gets selected to become the “sacrifice”?

Obama has even said that this matter could end his presidency. That sounds like throwing a temper tantrum.  Despite Standard and Poors’s benign video, it seems like a real breakdown could happen if the federal government cannot be counted on to pay what it “owes”.  The value of retirement portfolios, even for those with little debt, could fall sharply.  Real lives could become shorter.  None of this is good. Both parties need to get over their boorish behavior. 





Here is Ron Paul's movie preview from "Balanced Budget Productions", rated PG-13:


Would Rand Paul join in?  He probably wants wealthier seniors to give up all their entitlements now.

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