Moody's: Cut debt to gdp ratio or lose credit rating

[AZRedhawk44]

http://www.google.com/hostednews/afp/article/ALeqM5jsIJrjNbFnHfTteRFzNM3vLqKiug?docId=CNG.1990c2943612788ba4bed492da11c97b.891

For the first time since WWII, we owe a 1:1 ratio of our annual GDP.  We owe $14.5 trillion, and we as a nation make $14.5 trillion.

Reagan had the national debt down to 31% of GDP at one point.

So, Moody's says we need to get to 73% of GDP in order to preserve the AAA credit rating.  By 2015.

That means not just balancing the budget...

...but paying off 27% of the debt.  In 3 and a half years.  We have to pay off $3.9 trillion dollars in 3.5 years, or about 1.1 trillion dollars a year.  That requires us to run a $1.1 trillion surplus per year for that time.

To run that much of a surplus... we'd have to cut TWICE that from the budget... or about $2.2 trillion a year from spending.

Sigh.  Doomed.  Doomed, I say.

[RocketMan]

Not going to happen.  There is no way that the current crop of Washington idiots will accomplish that.  And the American people are, for the most part, too stupid to care about the problem.

[birdman]

They will when interest rates rise.

High interest rates, no growth, solar panels on the whitehouse...

I see the second part of the slogan "yes we can..." go back to the late 70's!

[RocketMan]

When interest rates rise, QE3.  That's all Bernacke has in his tool box.  And it will keep folks happy for awhile longer.  But it all has to end at some point.  And it will end badly.

[Ben]

Well, it will be interesting to see the response of the Obama machine, Barney Frank, and others, who were telling us all that we had to raise the debt ceiling because of Moodys. Somehow I think Moody's opinion will not matter so much to them if it comes to cuts. Because there is no way to fix that ratio by taxing alone.

[brimic]

Moodys. Feh. They were snowed into thinking subprime mortgage derivitives were worth AAA+ rating...

[Hutch]

So, what does the end game look like?  Japanese stagnation, or explosive inflation, or what?

[agricola]

Moodys. Feh. They were snowed into thinking subprime mortgage derivitives were worth AAA+ rating...

Both they and the Big Four accountancy / aduit firms do seem to have escaped any pain over the financial meltdown.  Maybe someone at the CIA could claim that KPMG are an al-Qaeda front organization?

[AZRedhawk44]

So, what does the end game look like?  Japanese stagnation, or explosive inflation, or what?

To get to 73%, several things "could" happen:

1.  GDP growth.  Instead of making 14.5 trillion, we could grow our economy to be worth 19-20 trillion annually.  Not likely to happen under Obama's policies, but if he gets bumped and a real capitalist workhorse takes the Presidency and then Senate is shifted in favor of capitalism, I guess it's possible.

2.  Inflation.  Our debt is worth 14.5 trillion.  If our economy stagnates and the Fed continues to print money, that same 14.5 trillion in value can be represented by a devalued dollar as 19 trillion, if inflation drives the cost of everything up about 33%.  I somehow doubt a massive devaluation of the Dollar will make Moody's happy with the prospects of American debt, though.

3.  Cuts.  Yeah, right.

4.  Taxes.  Taking 2.2 trillion more out of the economy each year (remember it's only worth a TOTAL of 14.5 trillion, and the federal government is already taking about 1.5 trillion in income taxes, another .75 or 1 trillion in corporate taxes, and a few hundred billion more in other ways... then the state/local govs take a combined 2-3 trillion... the "free" part of the 14.5 trillion is only about 9 trillion) would result in reduced spending across the board and a significant reduction in investment capital.  You want to make the Great Depression into the nation's SECOND largest economic pit hole, this would be the tactic to take.


With Obama in the WH and RINOs ultimately driving the Congress as the "policy arbitrators" between the Dems and the Tea Party folks, I expect scenario 2 to play out.

If we got a truly rabid Tea Party presence in Congress and a capitalist President, I expect a combination of 1 and 3 to play out... but by 2020 at the earliest.  Our credit rating WILL be devalued since there just isn't time or money to tackle 4 trillion worth of back-debt and a 2 trillion annual deficit by the deadline.  But we'll tackle it as best we can anyways.  Lots of socialist/entitlement lawsuits and Acorn actions to try and stall the cuts in spending that will take years or maybe decades to fully unwind.

If the voting public lashes out at the Tea Party and conservatism during the 2012 elections for some reason, I expect scenario 4 to play out.

[makattak]

When interest rates rise, QE3.  That's all Bernacke has in his tool box.  And it will keep folks happy for awhile longer.  But it all has to end at some point.  And it will end badly.

Monetary policy is ineffective after some point. (I am unspecific as we don't know where that point is.) That is why we ended up with the stagflation of the '70's. As the current Federal Reserve board members don't wish to be remembered like that, I am willing to bet they are very wary of any more monetary stimulus.

So, what does the end game look like?  Japanese stagnation, or explosive inflation, or what?

So long as the Fed controls monetary policy, explosive inflation is unlikely. (If Obama decides to mint those trillion dollar coins that some leftist idiots suggested, that will change.)

Japanese stagnation only works so long as our government can keep borrowing. Japan has been prevented from collapse by the very high savings rate of the Japanese people. (A luxury the US government doesn't have.)

My bet is sudden collapse. Countries can keep borrowing until suddenly they can't. It's never a slow process, it's a cascade. There are a few warning signs beforehand (like threats of credit downgrades...) but our politicians seem incapable of comprehending the warning signs. I just hope the collapse holds off until the next president (and congress) has a chance to ACTUALLY respond. I don't know if they will, but if Obama wins in 2012, collapse is certain.

How can I say this? CBO is currently predicting that we will be adding $3.5 TRILLION to the debt by 2016, under current baseline. (That is, after the passage of the debt ceiling "cuts"). We are projected to lower real deficits to $500 billion by 2014, but begin increasing actual deficits afterwards. These deficits are assumed to be smaller, percentage of GDP-wise, because growth is assumed. The current revisions of Q1 growth downward have already cost several hundred billion in "assumed" growth. (Compounding makes it very bad.)

IF we don't get a new president and congress that will kill the government-caused uncertainty in the economy (Obamacare, EPA run amuck, Dodd-Frank, NLRB, etc...), we will not grow anywhere near necessary JUST to meet the baseline. EVEN if we do meet the baseline (which I doubt), our debt will grow to $17 TRILLION by 2016.

If we continue our present anemic growth of ~1%, GDP will be 15.2 TRILLION in 2016 (CBO projects a GDP of $19.3 TRILLION). 17 TRILLION is 112% of 15.2 TRILLION.

However, if we don't grow, (or worse, drop into another recession that even Larry Summers says has a 1 in 3 chance of happening) our baseline is screwed and we will be borrowing more. Again, the recent revision of Q1 growth to .4% cost the baseline assumptions hundreds of billions of dollars in 2016. (Compounding really hurts.)

So 112% of GDP is a rosy scenario...



This is why I say I can't vote for another RINO. Another go-along-to-get-along milquetoast moderate doesn't solve the problem. We can no longer just mitigate the damage, it must be repaired.

I'm getting to the point where if the Republicans nominate a Romney or a Huntsman, I'll actively vote FOR Obama.

[brimic]

So long as the Fed controls monetary policy, explosive inflation is unlikely. (If Obama decides to mint those trillion dollar coins that some leftist idiots suggested, that will change.)

Hey, we wouldn't even need to print new denominations of money, just use Zimbabwe currency!!!!!111



Just like our fiat currency, but in prettier colors!

[longeyes]

The solutions are out there, drastic though some are, but it comes back to values, and this nation has changed culturally and demographically in the last decades.  I think solving the problem, for this nation entire at this moment, is de facto impossible.  We cannot incentivize growth if we are told that successful Americans are the enemy of the people, if we envy the wealth of others.  We cannot make cuts if too many Americans believe that getting something for nothing is their "entitlement."  Values.

Bonus question: When is a "depression" a loss of avoirdupois that was slowly killing you?

[longeyes]

In the last half-century, when American had things going its way, we had the opportunity to prudently manage our success and create trust funds to pay for Social Security and health care.  We chose to consume rather than save and then to consume far more by borrowing and printing.  

When we were investing in the rest of the world we should have owned more of that world rather than giving away our economic power through dubious and inequitable "trade deals."  That was lack of economic foresight--or, perhaps, chicanery by the few at the expense of the many.  We always have talked about creating "foreign markets;" what was wrong with that picture and why isn't it now paying off for us?  Much of that was a lie.

Then there's our military policies.  When you protect a big chunk of the world militarily, at the cost of trillions of dollars that could have been invested elsewhere and you don't charge a hefty fee for that service, you are either very foolish or you are not operating for the general good of your nation.

We are reaping what we--or more likely some of us, a some of us that need to be named--have sown.

[Azrael256]

Monetary policy is ineffective after some point. (I am unspecific as we don't know where that point is.)

Maybe when we stopped measuring the quantity of money and redefined what "is always and everywhere a monetary phenomenon" to mean "the price of a few arbitrary items purchased by people who live in the dark, don't eat, and use horses for transportation?"

No, it was earlier than that.  It was when we replaced a small computer that just printed 4% more dollars every year with a gaggle of morons who alternate between burning dollar bills in response to deflation and consuming the world's ink supply printing more to fix a debt crisis.

Around 1913, perhaps?

Did I mention that Milton and Fritz top my reading list?

[Tallpine]

They don't even need paper and ink to "print" money anymore, they just enter some number in a computer and there it is.   

[roo_ster]

Both they and the Big Four accountancy / aduit firms do seem to have escaped any pain over the financial meltdown.  Maybe someone at the CIA could claim that KPMG are an al-Qaeda front organization?

Toss in Fannie & Freddie and a few of the Wall Street firms coughGOLDMANSACHScough and you have the reward jobs and/or R&R positions for Democrat Party operatives and fed.gov GS-level bureaucritters that write the actual regulations.  They float in & out of them and gov't, depending on who is in office and who needs a deputy assistant secretary for this-and-such.  

IOW, they will never receive the scrutiny they deserve because who wants
 to foul the nest they will soon occupy?

[MicroBalrog]

That means not just balancing the budget...

...but paying off 27% of the debt. 

No, it doesn't.

Even if the debt remains at its current levels [ahahahaha!] its level as a percentage of GDP will reduce constantly. Even now, in this economy, America's GDP is still expanding.

[Tallpine]

No, it doesn't.

Even if the debt remains at its current levels [ahahahaha!] its level as a percentage of GDP will reduce constantly. Even now, in this economy, America's GDP is still expanding.

Okay, then - paying off 26% of the debt 

[AZRedhawk44]

No, it doesn't.

Even if the debt remains at its current levels [ahahahaha!] its level as a percentage of GDP will reduce constantly. Even now, in this economy, America's GDP is still expanding.

Gdp doesn't grow during recession or depression.

 http://www.econbrowser.com/archives/rec_ind/description.html

On a droid now so typing cutting pasting is a pita and I'm tempted to write like csd... But read the above link.  Recessions typically have negative gdp growth.  Ones that don't, have gdp growth less than inflation.

[makattak]

No, it doesn't.

Even if the debt remains at its current levels [ahahahaha!] its level as a percentage of GDP will reduce constantly. Even now, in this economy, America's GDP is still expanding.

See my post above. Growth won't get us out of this. (At least, not the growth we have now.)

[MicroBalrog]

See my post above. Growth won't get us out of this. (At least, not the growth we have now.)

The recession can be ended by means like deregulating parts of the economy. There is a number of things that can be done and will likely be done in the coming few years. Even Carter deregulated industries like trucking.

[birdman]

I think it's articles like this, combined with fed and treasury statements, combined with general attitudes and knee jerk responses from the rest of the administration that lead me to believe the most likely scenario is a monetary response (super-QE part troi?) to inflate the debt down.  Of course, given that all those mentioned in my first sentence have no concept of ripple effects and long term reactions, such a response could easily lead to a very bad inflationary cycle...especially given that the "official" math endorsed by the administration is inflation is at a long term low, while simultaneously making public statements about "helping" folks because prices have risen so much (hmmm...I wonder, do those seem contradictory?). That means the fed's normal monetary responses to low activity (monetization) are still acceptable (from a "as long as calculated inflation is less than such and such, increased quantitative easing is okay" stand point)..meaning "calculated inflation will remain low, while the inflation that matters to real people will skyrocket.

[Waitone]

Mortgage-gate could not have happened without the active participation of credit rates such as Moody's.  Moody's credibility is suspect; didn't say they were wrong, said credibility is suspect. 

[Angel Eyes]

Mortgage-gate could not have happened without the active participation of credit rates such as Moody's.  Moody's credibility is suspect; didn't say they were wrong, said credibility is suspect. 

How do you feel about Standard & Poor's?

http://money.cnn.com/2011/08/05/news/economy/downgrade_rumors/?hpt=hp_p1&iref=NS1

NEW YORK (CNNMoney) -- Credit rating agency Standard & Poor's on Friday downgraded the credit rating of the United States, stripping the world's largest economy of its prized AAA status.

The effect on the markets come Monday will be . . . interesting.
 

[brimic]

How do you feel about Standard & Poor's?

Considering that Standard & Poors was also rating subprime garbage at AAA, its a very bad sign for America.