S&P preparing to downgrade US credit rating?

[AZRedhawk44]

http://online.wsj.com/article/SB10001424052748704004004576270693061767996.html?mod=WSJ_hp_LEFTTopStories


The factoid I take out of this article:

In explaining its decision, S&P said the U.S. deficit "ballooned" to more than 11% of gross domestic product in 2009 from a range of 2% to 5% from 2003 to 2008.

Our DEFICIT is 11% of the entire GDP of our country.

That makes our government BUDGET (deficit + what we can actually afford) well over 25% of GDP.  2009 GDP for the US economy is $14.1 trillion.  The proposed total Fed budget for 2009 was $3.1 trillion with a $400 billion deficit but actually came in at a $1.4 trillion deficit, making the budget $3.5 trillion due to increased spending... and the government collected only $2.1 trillion instead of their anticipated ~$2.6 trillion.

At least 1 in 4 dollars in the US is spent on government.   And of that 1:4, about 1/3 of them are "make believe" dollars that we are borrowing and have no plan to pay back (aside from inflation). 

1/3 of 25-30% of the total GDP means that 8-10% of the ENTIRE economy is operating from foreign loans that we don't have a plan or intent to pay back.

That means the government has every intention of allowing 8-10% inflation since it has no plan to honorably pay back its debts.

[MechAg94]

That means the government has every intention of allowing 8-10% inflation since it has no plan to honorably pay back its debts.

Yep, all to help the poor working men and women whose pay will not keep up with inflation.

[Waitone]

It is a little late to talk about honorable actions.  Honorable actions should have been discussed all along while our morally challenged legislators were creating the problem.  We are now beginning to see the consequences of creating a morality-free society.

[AmbulanceDriver]

I have to say that I think this is a HUGE red flag.  This change alone makes it harder for the US to borrow money.  That means that we won't be able to keep up the everything-for-everybody programs.  But people don't want to hear about this.

The simple fact is that there are an awful lot of people with their heads in the sand about debt/deficit.  Heck, I've got a decent basic understanding of financial principles, and I can't wrap my head around 14+ TRILLION dollars of debt...  Those are mind-bogglingly huge numbers. 

Unfortunately, I'm afraid that even this isn't gonna wake people up.  Not enough.

[Tallpine]

Interest rates are what will pull down the whole house of cards.

Right now the feds are borrowing for almost nothing.

[Waitone]

$14 trillion is the FUNDED liability.  Unfunded liability approaches $60 trillion.

[AmbulanceDriver]

$14 trillion is the FUNDED liability.  Unfunded liability approaches $60 trillion.

'scuse


 

[Monkeyleg]

The unfunded liability for SS and Medicare is $114 trillion.

[TommyGunn]

$14 trillion is the FUNDED liability.  Unfunded liability approaches $60 trillion.

The unfunded liability for SS and Medicare is $114 trillion.

Oh boy, this just keeps getting better and better and better ...... 

US credit rating

WHAT credit rating would THAT be? ? ? ?

[sumpnz]

You know, with the way they calculate FICO scores the US.gov would probably have close to an 850.  And look where FICO score based lending got us ...

[MicroBalrog]

Select question: Is it possible for the U.S. government to selectively default on some obligations but not others?

[sumpnz]

I don't know for certain, but I see little reason why they couldn't from a theoretical POV.  As an individual you can default on your credit cards, while keeping up on the mortgage and car note.  Even in a formal bankruptcy you can re-affirm some debts and cancel others.

Realistically I don't the USA defaulting in my lifetime.  Even if they refuse to raise the debt ceiling they can (and probably hopefully would) pass legislation that bond holders get paid first.  And there's a slim chance of the debt ceiling not being raised.  The Reps will get some promise of a concession on spending from the Dems, the ceiling will get raised, and the Dems will reneg (in part or in whole) on whatever promise they made.  It's happened many times before (not necessarilly WRT to the debt ceiling but as a general modus operendi for the libs).

[makattak]

The unfunded liability for SS and Medicare is $114 trillion.

Fortunately, the Supreme Court has said we aren't required to pay that.

Select question: Is it possible for the U.S. government to selectively default on some obligations but not others?

Yes. Any entity can always choose what they will default on. Any default on any part of the US debt, though would raise borrowing costs for the US Government and, since we rely extensively on short term borrowing, this would very quickly raise the cost of financing our already massive debt.

We paid $414 BILLION ($413,954,825,362.17) to finance our debt last year. The debt has only grown since and that interest payment was at pretty much the minimum possible interest rate.

Just an increase of two percentage points would have raised last years' interest payments by nearly 300 BILLION dollars.

That's 2% of GDP. On top of 3% of GDP. So 5% of GDP would be going just to pay the interest on our debt.

And, since we obviously can't even pay the 3% we have now without going further into debt, this would compound.

And that's with just a 2 percentage point rise in the cost of financing US debt. If we are downgraded, or default, the rise could be much, MUCH worse and the compounding problems snowball faster.

[longeyes]

Yep, all to help the poor working men and women whose pay will not keep up with inflation.

And all the small savers and investors who were stupid enough to believe they'd get a return on their money without speculating, and all the people on fixed incomes.

A debt ceiling need not impose default any more than a debt ceiling on your credit card does.  It means cutting elsewhere, selling one's record collection, as it were.  Let Obama make that choice.

[roo_ster]

What's that I smell? 
Stagflation
According to the old methodology in place up to the mid1980s or so, current annual inflation is at 9.8%.  The current methodology says 2.x%

Expect more inflation, as fed.gov uses it to Quantitatively Ease its debt burden, in addition to cuts and higher taxes.

Boys, that bill run up since FDR just came due.  WE and our kids are the "children" that will pay off the debt.  Thank you Progressivisim, for your 1:1 scale experiment in profligacy and socialism.

[Tallpine]

The current methodology says 2.x% [inflation]

That's only because necessities like computer memory and huge screen TVs have come way down in price, while luxuries like food, clothing, and gasoline have gone up.   

[roo_ster]

One other note:
The metric nat'l debt/# households results in a figure larger than my mortgage.  The idea of taking up a second mortgage, larger than my current mortgage, and the burdens it would impose on me over 30 years puts the nat'l debt into some perspective. 

At the end of those 30 years of debt payments and privation, I would end up with...nothing.

[roo_ster]

http://www.nationalreview.com/corner/265052/very-good-question-about-our-national-debt-jim-manzi

Here is part of the blog post:
On Friday, I published a blog post on the national debt with key points that can be summarized as:

(1) The idea that we will have anything like currently anticipated entitlement payouts plus currently anticipated tax rates is a fantasy;
(2) This gap is enormous, and represents the “mother of all bubbles”;
(3) Our debt situation means that we need to address it quite soon or face a funding crisis; and therefore
(4) The correct primary metric for evaluating anybody’s plan to do this is what practical measures it puts in place now and how much additional time this creates for us prior to this crisis, rather than theoretical and unenforceable promises about the distant future.

A very smart commenter at the American Scene called “cw,” who almost always disagrees with me in a highly productive way, asked what I think is an excellent question:

So here is a technical question for Jim or whoever else can answer it: how much would taxes need to be raised to maintain our current entitlement regime?

The total present value of payments expected under Social Security and Medicare beyond what is expected to be collected under current tax laws is about $100 trillion. One way to put that amount of money in context is to note that it is about twice the amount of all the net private assets that exist in America today.

To answer cw’s question directly, the best back-of-envelope estimate is that meeting this unfunded portion of our Social Security and Medicare commitments would require roughly an immediate 80 percent increase in federal income taxes, sustained forever.


Let me repeat:
"...meeting this unfunded portion of our Social Security and Medicare commitments would require roughly an immediate 80 percent increase in federal income taxes, sustained forever."

Take your fed.gov tax bill (income & payroll taxes) and multiply by 1.8.  Do the same for those your employer pays on your behalf.

Does anyone expect this to occur?  Does anyone expect that if fed.gov tax rates increase by 1.8X, that fed.gov will take in 1.8X revenue?

[Waitone]

According to the old methodology in place up to the mid1980s or so, current annual inflation is at 9.8%.  The current methodology says 2.x%

Expect more inflation, as fed.gov uses it to Quantitatively Ease its debt burden, in addition to cuts and higher taxes.

Boys, that bill run up since FDR just came due.  WE and our kids are the "children" that will pay off the debt.  Thank you Progressivisim, for your 1:1 scale experiment in profligacy and socialism.

If you are really in a mood to blow breakfast chunks surf on over to http://www.shadowstats.com/  and browse at your leisure.  Then when your tummy has calmed down drill down at http://www.shadowstats.com/alternate_data and view pictures of how fed.gov has diddled economic statistics for the purpose of distorting reality AND lower its liability to "We the Taxed".

Enjoy!

[Scout26]

One other note:
The metric nat'l debt/# households results in a figure larger than my mortgage.  The idea of taking up a second mortgage, larger than my current mortgage, and the burdens it would impose on me over 30 years puts the nat'l debt into some perspective. 

At the end of those 30 years of debt payments and privation, I would end up with...nothing.

Meanwhile the wife is maxing out the credit cards, and going to get more.....

[roo_ster]

http://www.nationalreview.com/corner/265136/red-tide/michael-walsh
"Well, looky here: Hard on the heels of the House’s passage of Rep. Paul Ryan’s bold “path to prosperity” budget — and just in time for the big debate over raising the nation’s $14 trillion debt ceiling in order to keep borrowing money we don’t have to keep funding “entitlement” programs we can no longer afford in their present forms — along comes the credit-rating agency, Standard & Poor’s, with a bracing dose of reality therapy…"


The country's in the very best of hands:
http://www.youtube.com/watch?v=NwqPBlSxb-0&feature=player_embedded

[roo_ster]

Oh, the hits keep on coming:
http://www.nationalreview.com/exchequer/265018/enron-writ-large

"Who has better credit than Uncle Sam? If you ask the bond market, that elite list includes Berkshire Hathaway, Procter & Gamble, Lowe’s, Johnson & Johnson, and a host of other blue-chip corporate borrowers. The U.S. government has the ability to levy taxes on the largest national economy in the world, a vast and fearsome revenue-collection apparatus, and more than two centuries of constitutional government under its belt. P&G has Tampax."

[RevDisk]

After talking to way too many economists, how it's going to shake down is pretty inevitable.  The necessary tax revenue raises or spending cuts to balance the budget or simply bring it down to sustainable debt levels is basically not politically feasible.  Imagine taxes more than doubling (tax rates would have to go higher, as you have diminishing returns as you raise them), or more than half of all government spending being slashed. 

Simply put, no economist really believes this problem will be fixed.  Or likely will be.

So what's probably going to happen is, things will continue exactly as is.  Minus some political theater, a token spending cut or tax raise.  So, the debt will grow until either folks stop buying and/or the US can't make the interest payments.  Along the way, the US credit rating will drop.  This doesn't mean much, actually, except that interest rates on the debt will have to rise (else people will not buy as many).

The credit rating dropping would be a good thing for the US government in the short term, as more folks would be willing to invest their money at a higher rate of return.  Credit card lenders are not extremely happy with folks with perfect credit, and thus low interest rates.  Bad news is, that's higher interest payments.  Servicing the debt becomes more expensive.

Along the way, there are certain stopgaps that the US Federal Reserve and US Treasury will do.  Inflate the money supply, dork around with inflation, try to dork around with interest rates, etc etc.  These are tactical decisions, not strategic.  They'll change the timetable but not the end state. 

If nothing changes, the US will simply continue to borrow until no one will lend to them or they cannot make payments.  Not making payments is probably the more likely, but it'd depend on the world economy at the time.  After trying all of the time buying tricks, that will be the day where reality hits home. 

The US will default, inflate away the debt, or take the financial responsibility path.  Defaulting is relatively straight forward, they simply do not pay the interest and/or refuse to redeem any outstanding treasury securities.  But this would also piss off a very large number of foreign countries, corporations, the entire financial community of the world, and pretty much anyone with any investments whatsoever to include pensions.  Many pensions require a portion or all of the pension investments to be in US government securities.  Inflating away the debt with extremely high inflation is possible, but political suicide for any incumbent due to civil disturbances and loss of quality of life.   

Financial responsibility would be a mix of draconian spending cuts and revenue increases, driven by lack of other options.  This may actually be the most possible out of the three end states, but I personally believe it will be a mix of all three slapped together in desperation. 

[Monkeyleg]

Obama claims that S&P's downgrade is political, but I heard on Sean Hannity's show that the last time S&P downgraded the US credit rating was on December 7th, 1941.