United States Credit Rating

[SixNein]

Many economists are predicting that America will get downgraded from AAA by at least one agency regardless if congress raises the debt limit. There has already been a great deal of damage caused from the political posturing in Washington. If the central government's debt gets marked down, I would also expect the same to happen to various states and companies.

How do you think this will effect you as a person?

But more importantly, do you think America is becoming ungovernable?

[Vanadium 50]

Why do you think it's "posturing"?

The bond rating is driven by the probability that one will get paid back. For decades, the US government has been spending more than it takes in, and if this continues, eventually bondholders will not get paid back (or will be paid back in inflate currency). I don't think this has anything to do with "governable" or "ungovernable". It's just comparing the sizes of two numbers.

If the US wants to spend x% if it's GDP on the federal government, as a lender, I'd want to see that it can sustain this level of taxes for several consecutive years, irrespective of x.

The only thing that I think is leading to "ungovernability" is the idea that 51% of the populace should pay no taxes and should decide how to spend the other 49%'s money. I don't think this is sustainable long-term.

[Ivan Seeking]

Many economists are predicting that America will get downgraded from AAA by at least one agency regardless if congress raises the debt limit. There has already been a great deal of damage caused from the political posturing in Washington. If the central government's debt gets marked down, I would also expect the same to happen to various states and companies.

How do you think this will effect you as a person?

It will be a defacto tax hike for everyone. It could stall the recovery and lead a double-dip recession. It could change our standing in the world forever.

But more importantly, do you think America is becoming ungovernable?

There has been one great principle that has guided our country from the beginning - politics is the art of the possible; compromise. As long as the right prides itself on a refusal to compromise an untenable position, and as long as they hold control of the house, there seems to be little hope.

When Kennedy came into office, the top marginal tax rate was 91%. Today, at 35%, our tax rates are the lowest they've been since Truman. Yet, while they waive the flag, the tea partiers refuse to give an inch for the good of the nation and they are holding Boehner hostage. What worries me is not that they will win the fight. Eventually calmer heads will prevail. What worries me is how much damage they will do before their followers figure it out.

[Vanadium 50]

Ivan, the President has a debt-ceiling extension with some (not a lot) bipartisan support from the House that he could sign. Many people would say it's not a very good deal, but he has it. If he chose to, he could get the Senate to pass it and he could sign it.

The fact that he doesn't think it's a good deal - and a sufficiently bad deal that default is better - is fair enough. But he does have a choice.

I don't much like the Republican plan. But I have to give them credit for having put something out there. The alternative is very murky - "I will trade you tax increases and debt limit increases today for spending cuts down the road" is very non-specific.

[SixNein]

Why do you think it's "posturing"?



Yes, it's pure posturing. The entire thing has mostly been about the 2012 election cycle. The entire debate has been framed for the upcoming election.



The bond rating is driven by the probability that one will get paid back. For decades, the US government has been spending more than it takes in, and if this continues, eventually bondholders will not get paid back (or will be paid back in inflate currency). I don't think this has anything to do with "governable" or "ungovernable". It's just comparing the sizes of two numbers.


The United States was on track to pay off its deficit towards the end of the 90's; however, many seen the surplus as something negative. Some argued that the surplus was a sign that the government should lower taxes and/or increase spending. In general, politicians are under extreme pressure to raise spending and lower taxes during election cycles, and they are frequently punished if they fail to deliver. The situation to me is a sign that the republic is becoming ungovernable.


If the US wants to spend x% if it's GDP on the federal government, as a lender, I'd want to see that it can sustain this level of taxes for several consecutive years, irrespective of x.

The only thing that I think is leading to "ungovernability" is the idea that 51% of the populace should pay no taxes and should decide how to spend the other 49%'s money. I don't think this is sustainable long-term.

There exists some deceitful accounting tricks in regards to who contributes to federal revenue. Every American pays payroll taxes, and those taxes are capped. The surplus of the social security fund has been going into general revenue for years. So this has essentially served as an invisible income tax that primarily effects the 51% because it is capped. I would also point out that the bottom makes contributions in other ways outside of taxes. As the lower classes are frequently the ones who fight wars.

But you are right in a sense. I think the religion of always lowering taxes and increasing spending is certainly increasing the instability of our government. In addition, America is currently going through many demographic changes. The white race will not be a majority in a few years. The majority will be minorities.

[SixNein]

Ivan, the President has a debt-ceiling extension with some (not a lot) bipartisan support from the House that he could sign. Many people would say it's not a very good deal, but he has it. If he chose to, he could get the Senate to pass it and he could sign it.

The fact that he doesn't think it's a good deal - and a sufficiently bad deal that default is better - is fair enough. But he does have a choice.

I don't much like the Republican plan. But I have to give them credit for having put something out there. The alternative is very murky - "I will trade you tax increases and debt limit increases today for spending cuts down the road" is very non-specific.

To put things in perspective, the democrats were risking a great deal more politically than the republicans. The republicans are going to bring up the offer made by democrats to cut entitlement spending on the campaign trail over and over again. I guarantee that it will come up in the presidential race. The democrats were simply asking for the republicans to take some risk too on the tax issue. Quite frankly, there was not a great deal of taxes involved, but there was enough to where republicans had some political stake in the bill too.

At the end of the day, seniors are the most likely group to vote. And democrats will hold all blame for cuts in entitlement spending.

[Pengwuino]

I'm a bit confused on this whole doomsday scenario about defaulting on debt. I was under the impression that the US was one of maybe only 2 countries in the world that have never defaulted on their debt. A quick googling shows that maybe we did once on purpose under Roosevelt for some odd reason that I'm not all that interested in. Sure we'll pay more to have debt, but some of this nonsense of saying in 2 weeks we'll become a third world nation sounds ridiculous.

[SixNein]

It will be a defacto tax hike for everyone. It could stall the recovery and lead a double-dip recession. It could change our standing in the world forever.



There has been one great principle that has guided our country from the beginning - politics is the art of the possible; compromise. As long as the right prides itself on a refusal to compromise an untenable position, and as long as they hold control of the house, there seems to be little hope.

When Kennedy came into office, the top marginal tax rate was 91%. Today, at 35%, our tax rates are the lowest they've been since Truman. Yet, while they waive the flag, the tea partiers refuse to give an inch for the good of the nation and they are holding Boehner hostage. What worries me is not that they will win the fight. Eventually calmer heads will prevail. What worries me is how much damage they will do before their followers figure it out.

Boehner is framing everything around the 2012 election. There are around 80 tea party seats in the house, so he could make a deal if he really wanted to do it by picking up votes by democrats and moderate republicans. Most likely, the GOP has planed to drag this out all the way through the 2012 election from the beginning. The debt ceiling is being used as a tool for the GOP to set national agenda and keep Obama tied up.

And most likely, it will be a very successful strategy for them.

[SixNein]

I'm a bit confused on this whole doomsday scenario about defaulting on debt. I was under the impression that the US was one of maybe only 2 countries in the world that have never defaulted on their debt. A quick googling shows that maybe we did once on purpose under Roosevelt for some odd reason that I'm not all that interested in. Sure we'll pay more to have debt, but some of this nonsense of saying in 2 weeks we'll become a third world nation sounds ridiculous.

I don't know about a 3rd world country, but a default could be very damaging. It would have the ability to trigger a full blown financial meltdown. In a basic nutshell, it would have a huge impact on our financial institutions, states, and corporate world in general.

But I doubt we'll go down that path.

[chiro]

The interest on new debt instruments would rise (due to higher risk), and I would hate to think of the situation of the people that have to foot the extra bill.

[SixNein]

The interest on new debt instruments would rise (due to higher risk), and I would hate to think of the situation of the people that have to foot the extra bill.

Just think of the housing market and all those variable loans still out. Or the massive amount of credit card debt.

[Pengwuino]

I don't know about a 3rd world country, but a default could be very damaging. It would have the ability to trigger a full blown financial meltdown. In a basic nutshell, it would have a huge impact on our financial institutions, states, and corporate world in general.

But I doubt we'll go down that path.

See, I don't even see how that would happen. The markets already know what's going on. I can't imagine anyone with any real financial power is going to wake up on the hypothetical day we default on debt and think "wow! I thought the US was being superbly governed and our credit to them was never something to worry about". I've heard Moody's is ready to downgrade the US regardless if we default or not.

The interest on new debt instruments would rise (due to higher risk), and I would hate to think of the situation of the people that have to foot the extra bill.

Why? We'd fall in line with pretty much the rest of the developed world. It's not like we're declaring bankruptcy. We're going to go from the absolute best rating to something a bit less if we default. We'll have to pay some more and the very fact that it looks like we can at the least talk about budget cuts and raising taxes means that this is probably the worst it can get outside of some terrible new calamity to hit the country. Sometimes I think this debt crisis is just a slow news day when you consider realistic consequences.

Just think of the housing market and all those variable loans still out. Or the massive amount of credit card debt.

Those loans aren't US public debt. It's a different system altogether.

[russ_watters]

There exists some deceitful accounting tricks in regards to who contributes to federal revenue. Every American pays payroll taxes, and those taxes are capped. The surplus of the social security fund has been going into general revenue for years. So this has essentially served as an invisible income tax that primarily effects the 51% because it is capped. There is another deceitful accounting trick there, though: the fact that the benefits are deferred doesn't mean they aren't still real. If you subtract-out the future benefits, the scale for the wage tax becomes progressive again (the tax is flat, the benefits are not).

[Pengwuino]

There exists some deceitful accounting tricks in regards to who contributes to federal revenue. Every American pays payroll taxes, and those taxes are capped. The surplus of the social security fund has been going into general revenue for years. So this has essentially served as an invisible income tax that primarily effects the 51% because it is capped. I would also point out that the bottom makes contributions in other ways outside of taxes. As the lower classes are frequently the ones who fight wars.

That's kind of a poor argument though. Sure, lower classes fight the wars. However, lower classes use the most government resources as well. Plus the higher classes are the ones responsible for innovation and job creation (engineers and biochemists don't come cheap). You can't really say "well, this class does this and this class does that ergo disproportional taxes are fair or unfair". You are a citizen of the united states, you should pay your fair share.

The problem really is that lower classes don't really have much contact with taxes. Most of the people I know are young and thus lower class. None of them pay income tax really. Even the most inexperienced tax preparer (or hell, we have software now) can point out easy ways to have people pay no taxes (which makes me hate when people claim tax cheating is only for rich people).

I was overhearing a couple of friends once talking about taxes. One was complaining about how conservative his parents were. Neither of them pay taxes because they're students with almost no income. The guy complains "Isn't it funny how the people who pay taxes are always the ones saying they're bad". The other replied "I know, isn't that so sad?". There he was, getting government subsidized education and paying no income taxes due to him being a student (tax credits) and wondering why his parents don't love high taxes like he does. I think there is a genuine disconnect between people and the state of the tax system.

The annoying part is that the most vocal people, poor people and rich people, are the ones who will be least affected by any tax increase or decrease. It's people like my father, middle class with a side business that make enough to not be eligible for any government help or tax cuts yet not enough so that he can easily absorb any tax increase, that really would feel the effect of changes in taxes.

[russ_watters]

...oh, and it also requires calling retired people non contributors.

[mege]

...oh, and it also requires calling retired people non contributors.

Why? Many different types of retirement payouts are taxable.


@Poor fighting wars comments - They're getting paid for it. Not being forced into it. So, going into the military is a very good thing, and is probably one of the best social programs that the US has going for it (accepting your poor-do-it-more premise). Service(wo)men have worked for and earned their GI Bill, bonuses, benefits and wages.

[Pengwuino]

@Poor fighting wars comments - They're getting paid for it. Not being forced into it. So, going into the military is a very good thing, and is probably one of the best social programs that the US has going for it (accepting your poor-do-it-more premise). Service(wo)men have worked for and earned their GI Bill, bonuses, benefits and wages.

I fully agree with this. I could go on all day about how good the military is for some people. My nephew was circling the drain in his life out of high school. Then he joined the military. Served a term in Iraq and by the time he came home he was a changed man. He was respectful, in shape, and even wanted to become a chef. The obvious argument is that oh you could die in the military. Well being poor in the US is not exactly safe either. In fact, I wonder how many people are killed everyday in the US because they just don't live in the right neighborhood or make enough money to get out.

For some reason the military couldn't extract his laziness from him though...

[WhoWee]

Many economists are predicting that America will get downgraded from AAA by at least one agency regardless if congress raises the debt limit. There has already been a great deal of damage caused from the political posturing in Washington. If the central government's debt gets marked down, I would also expect the same to happen to various states and companies.

How do you think this will effect you as a person?

But more importantly, do you think America is becoming ungovernable?

First of all, the US national debt is on a tragectory to $20Trillion+ - the President's budget that was voted down 97-0 would have driven it to 25Trillion. Next, The growth projections of approximately 4% are not being met currently - new report out today will be in 1.5% to 2% range. Third and VERY important - Quantitative Easing (the printing of money) coupled with downward pressure on interet rates (to 0) are being watched very closely by the world - interest rates HAVE TO RISE. Fourth, our unfunded liabilities approximate $60Trillion to $140Trillion (opinions vary). Last, did you notice how much you paid for gasoline this morning? Energy costs are near all time highs (in spite of the great oil reserve tap-in by President Obama).

IMO - we are being downgraded because we're on an unsustainable path - and the financial sector knows it - blaming a downgrade on political sparing over this issue is naive.

http://www.naturalnews.com/032721_unfunded_liabilities_collapse.html
http://investmentwatchblog.com/total-us-unfunded-liabilities-are-estimated-at-144-trillion-roughly-1-2-million-per-taxpayer-was-that-a-pin-dropping/
http://www.americanthinker.com/2009/09/is_the_us_government_bankrupt.html

[BobG]

If the US credit rating is downgraded, it's because we've been mismanaging the budget ever since the FDR years; not because of one fight over the debt ceiling.

Taxes should be used solely to fund the government so the government can provide vital infrastructure for its people, defend its people, etc. If there's not enough revenue to provide the services government wants to provide, then government has cut the services it finds least important or raise taxes.

When you venture into this idea that the government can use taxes, tax cuts, and/or government spending to drive the nation's economy, then it gets into trouble. Tax cuts to tweak the economy/govt spending to tweak the economy are just two wings of the same radical idea of making government do more than it designed to do.

Traditionally, when the government has run up debts, it was almost always for legitimate reasons and the nation always had to endure a combination of higher tax rates and reduced services until the debt was paid off.

I wouldn't necessarily say running up debts during FDR's time was a horrible thing to do, but we did wind up with enough debt that paying it off wouldn't be fun at all. So Congress started finding creative ways to avoid paying the debt. High inflation rates made the debt seem smaller, so they could fool themselves into thinking they were paying off the debt even when they weren't. Not so horrible an idea - wait long enough and the debt wouldn't seem hard to pay off at all.

Except, actually, you could do that with quite a lot of debt. And it let Congressmen off the hook. Conservative Congressmen could win tax cuts and liberal Congressmen could win spending on increased services. Win, win and you'll let inflation shrink the debt.

The last decade or so, though, we've really taken that to stupid extremes. We'll fight a war and cut taxes. Then we'll bail out the nation's economy. Then we'll increase spending to increase employment (except most of that spending went to other things besides job creation - such as expanding the govt role in health care).

And now we've run the debt up so high it won't be fun to suffer while it's being paid off - and no one believes Congress would ever make Americans suffer. In fact, any Congressman that makes Americans suffer will be voted out of office. We'll never really balance the coffers by paying off that debt - and everyone knows it. And that debt puts the nation at risk when the next crisis arises - which it will.

[mheslep]

Many economists are predicting that America will get downgraded from AAA by at least one agency regardless if congress raises the debt limit. No, given a raise in the debt limit the downgrade is forecast only if the federal government fails to come up with sufficient deficit reductions.

There has already been a great deal of damage caused from the political posturing in Washington.
Such as?

[mheslep]

...
I don't much like the Republican plan. But I have to give them credit for having put something out there. The alternative is very murky - "I will trade you tax increases and debt limit increases today for spending cuts down the road" is very non-specific.

I agree, though the the White House is vigorously pushing back against characterization that they don't have a detailed plan.
AbKemPlo-2E

[Char. Limit]

I don't know... if I were a financial agency, I'd be downgrading too. It's obvious that Congress isn't interested in doing anything that doesn't support their political agenda, whatever it may be.

Label entire post IMHO.

[SixNein]

See, I don't even see how that would happen. The markets already know what's going on. I can't imagine anyone with any real financial power is going to wake up on the hypothetical day we default on debt and think "wow! I thought the US was being superbly governed and our credit to them was never something to worry about". I've heard Moody's is ready to downgrade the US regardless if we default or not.


Because the consequences of failing to raise the debt ceiling are so high, markets have been betting that congress will raise the debt limit despite all of the theatre. We are just now seeing a little bit of volatility in the market as some are getting nervous.

S&P is the one who is threatening to downgrade the AAA rating even if a default is avoided. Moody's and others are content as long as the debt limit is raised.


Those loans aren't US public debt. It's a different system altogether.

Interest rates for consumer loans are based in part on interest rates of government bonds. So if government bonds rates increase, consumer interest rates will also increase.

[SixNein]

Such as?


http://www.ft.com/cms/s/0/1f5b72c2-b883-11e0-8206-00144feabdc0.html#axzz1TMiqbNAc

[WhoWee]

Because the consequences of failing to raise the debt ceiling are so high, markets have been betting that congress will raise the debt limit despite all of the theatre. We are just now seeing a little bit of volatility in the market as some are getting nervous.

Are you talking about a 200 point drop in the DOW - after the bad manufacturing report came out today?

[mheslep]

http://www.ft.com/cms/s/0/1f5b72c2-b883-11e0-8206-00144feabdc0.html#axzz1TMiqbNAcPerhaps you meant to say there 'may be damage' instead of 'already has'?

The markets’ response to the debt ceiling showdown in Washington has so far been muted...

[SixNein]

Perhaps you meant to say there 'may be damage' instead of 'already has'?

You have to read the rest of the article:

Money markets have begun to horde cash.
Banks are conserving liquidity.
Talk of financial Armageddon hurts consumer confidence.
Investment planning in the public sector is at a standstill.


So Washington’s endless squabbling over fiscal policy, and in recent days the mounting risk of a self-imposed calamity, have already taken their toll.

[SixNein]

Are you talking about a 200 point drop in the DOW - after the bad manufacturing report came out today?

Dow has been selling for 4 straight days.

http://online.wsj.com/article/BT-CO-20110727-721031.html

[WhoWee]

Dow has been selling for 4 straight days.

http://online.wsj.com/article/BT-CO-20110727-721031.html

I find it ironic that you picked an article that cites Caterpillar - given the stimulus - shouldn't they be trading at all time highs?:rolleyes:

[mheslep]

You have to read the rest of the article:

Money markets have begun to horde cash.
Banks are conserving liquidity.
Talk of financial Armageddon hurts consumer confidence.
Investment planning in the public sector is at a standstill.Well I would not characterize the above as a "great deal of damage." Also, one could just as easily make the argument that financial jitters are due the judgement that the current deficit reduction proposals are insufficient, and that therefore if they can't be accomplished in this environment then they never will be.

[russ_watters]

Any deal struck in the next few days will include no ACTUAL spending cuts, only PROMISED spending cuts. Given that Reagan agreed to a similar deal in the 80s and the spending cuts never happened, I wonder if the rating agencies care at all about the "deal" we get? Ultimately, spending cuts can only happen through a budget.

[WhoWee]

Any deal struck in the next few days will include no ACTUAL spending cuts, only PROMISED spending cuts. Given that Reagan agreed to a similar deal in the 80s and the spending cuts never happened, I wonder if the rating agencies care at all about the "deal" we get? Ultimately, spending cuts can only happen through a budget.

The politicians can claim cuts and spin it any way they like - but the rating agencies are more sophisticated than the voters - aren't they? Doesn't Harry Reid's plan include spending cuts related to the pull out of Iraq and Afghanistan - something that will happen regardless?

There is no escaping the fact of a $14.3Trillion debt, that QE-1 and QE-2 (printing of money) coupled with downward pressure on interest rates and high energy costs will have consequences - perhaps inflation, that $2+Trillion is needed to get the President past his re-election (attempt), the current trajectory will exceed $20Trillion, the President's last attempt at a budget would have pushed the trajectory to about $25Trillion - IF growth is 4% - not the current 2% and the lack of a budget - let alone a balanced budget moving forward.

[BobG]

Any deal struck in the next few days will include no ACTUAL spending cuts, only PROMISED spending cuts. Given that Reagan agreed to a similar deal in the 80s and the spending cuts never happened, I wonder if the rating agencies care at all about the "deal" we get? Ultimately, spending cuts can only happen through a budget.

I don't think they do. They only care about whether a deal is done, period. And only in the sense that this current 'crisis' is a chance for our government to prove conclusively that it's lost its mind.

Granted, the argument about the debt ceiling does provide an indication of the tone of Congress and presenting a tone that Congress just might finally be taking the idea of reducing budget deficits seriously is a positive indication. Just not something particularly significant unless it's accompanied by real action in the forthcoming budgets.

[mheslep]

The credit rating agencies are concerned not only with the fact of deal, but the terms of the deal.

S&P managing director John Chambers said ....

Chambers added in the interview that even if the parties agree to raise the debt ceiling, it may not be enough to avert a downgrade. Chambers said the country must implement a plan to reduce the annual budget deficit by roughly $4 trillion over 10 years, which makes the debt manageable over the long term.
http://www.washingtonpost.com/business/economy/sandp-warns-that-chance-of-downgrading-us-credit-rating-is-50-percent/2011/07/14/gIQAvUzwEI_story.html

[WhoWee]

The credit rating agencies are concerned not only with the fact of deal, but the terms of the deal.


http://www.washingtonpost.com/business/economy/sandp-warns-that-chance-of-downgrading-us-credit-rating-is-50-percent/2011/07/14/gIQAvUzwEI_story.html

Again, the politicians can spin it, posture and blame each other all day long, but there's no hiding from the facts. I have mixed feelings on S&P's statement. On one hand the clarity of their position is good - on the other they should avoid the politics.

[mheslep]

Any deal struck in the next few days will include no ACTUAL spending cuts, only PROMISED spending cuts. Given that Reagan agreed to a similar deal in the 80s and the spending cuts never happened, I wonder if the rating agencies care at all about the "deal" we get? Ultimately, spending cuts can only happen through a budget.Eh, from my understanding, such as it is, the House plan has a large and real difference this time. In the Reagan case Democrats in congress promised Reagan 3:1 cuts after the fact for taxes raised in the TEFRA bill of 1982 (http://en.wikipedia.org/wiki/Tax_Equity_and_Fiscal_Responsibility_Act_of_1982) which Reagan signed, and after which the Congress reneged with a follow on appropriations bill which became law by overriding Reagan's veto. The point being from back then that the promised cuts were never law.

In the present case (http://cbo.gov/ftpdocs/123xx/doc12341/HouseBudgetControlActLetterJuly27.pdf), if the Senate passes the House plan and Obama signs it, then the cuts spelled out there become law, and they will occur unless a majority of the House and Senate in coordination with the President all take positive action in the future to stop them from taking place. That is, if the future Congress never showed up then without this proposed law most authorized spending will increase on autopilot. Similarly, with this law in place, if a future Congress never showed up then the same authorized spending will fall by ~$1 trillion/10 years, and $22 billion in 2012.

This is nowhere near enough in cuts, but then it can be revisited in six months when the credit line again runs out.

[russ_watters]

There are no cuts outlined there, only a global spending cap, completely lacking in specifics. And the joint action that could override this bill is called the 2012 budget!

[mheslep]

And the joint action that could override this bill is called the 2012the budget!And if the caps were blown out in that budget, the Republican House would have actively go along with it. No way.

[Char. Limit]

So what do you think the odds are that we'll ACTUALLY default?

I want a number.

[WhoWee]

This is nowhere near enough in cuts, but then it can be revisited in six months when the credit line again runs out.

This is the reality at the end of the day - isn't it? IMO - the results of the 2010 didn't convince our leaders - we will not have clarity on this subject until after the 2012 election.

[WhoWee]

So what do you think the odds are that we'll ACTUALLY default?

I want a number.

IMO - we have a 0% chance of default. Maybe the question should be "what is the chance of the Dems forcing a Presidential end run with the 14th Amendment"? I expect a last minute swoop-in by the President on August 3 to "save the day".

[mheslep]

There are no cuts outlined there, only a global spending cap, completely lacking in specifics. ...In addition to the caps ...

...Eliminate the subsidized loan program for graduate students. Beginning July 1,
2012, the bill would eliminate the interest subsidy...

...Eliminate loan repayment incentives. Beginning July 1, 2012, the bill would
terminate, with one exception, the Secretary of Education’s authority to make
incentive payments to borrowers

[mheslep]

This writer (http://www.nationalreview.com/corner/272996/bind-ramesh-ponnuru) says more succintly what I was about to say:

One thing we’re hearing a lot from Boehner-plan skeptics today is the refrain that “one Congress can’t bind another”: It’s better to get spending cuts front-loaded, because future Congresses can always exceed any caps. That’s true. But of course by the same token future Congress can always reverse today’s spending cuts in full. The question is what actions can be taken now to influence future spending. Front-loaded cuts would help. But so would legally enforceable spending caps of the sort found in the Boehner plan. Yes, future Congresses can waive them. But so long as supporters of the caps hold the House, the Senate, or the presidency they can maintain them. Without caps written in law, it would be easier for the appropriations bills to exceed them without there ever being a single vote on the total.

[SixNein]

Any deal struck in the next few days will include no ACTUAL spending cuts, only PROMISED spending cuts. Given that Reagan agreed to a similar deal in the 80s and the spending cuts never happened, I wonder if the rating agencies care at all about the "deal" we get? Ultimately, spending cuts can only happen through a budget.

The republican bill has specific cuts for students.

Of course, it also brings the topic back up in 6 months.

[SixNein]

This writer (http://www.nationalreview.com/corner/272996/bind-ramesh-ponnuru) says more succintly what I was about to say:

Front end cuts are not a good idea because we have a very fragile economy.

[SixNein]

So what do you think the odds are that we'll ACTUALLY default?

I want a number.

My reaction is to say zero percent chance; however, many members of congress have yet to drop political posturing, and there is only 5 days left. They are certainly showing willingness to do economic harm by playing this debt limit thing for so long. This debate is now an international issue.

[mheslep]

Front end cuts are not a good idea because we have a very fragile economy.I don't buy the spending stimulates the economy argument any more, at all. Rather I think that, absent serious front end cuts, people will reasonably calculate:
1 future tax increases to pay for the mounting debt
2 the collapse of medicare and SS
3 a credit rating downgrade accelerating 1 & 2.
4 more money printing to inflate away both the debt and their savings.
5 lower consumption because of expectations 1-4 (http://en.wikipedia.org/wiki/Permanent_income_hypothesis)

[WhoWee]

I don't buy the spending stimulates the economy argument, at all. Rather I think that, absent serious front end cuts, people will reasonably calculate:
1 future tax increases to pay for the mounting debt
2 the collapse of medicare and SS
3 a credit rating downgrade accelerating 1 & 2.
4 more money printing to inflate away both the debt and their savings.
5 lower consumption because of expectations 1-4 (http://en.wikipedia.org/wiki/Permanent_income_hypothesis)

...yep

[mheslep]

So what do you think the odds are that we'll ACTUALLY default?

I want a number.Default on interest on the debt near zero, yes, but the debt limit and credit rating downgrades are a different story. According to the "wisdom of the crowd", the chance as of tonight that the debt limit will be raised by July 31 is 12%.
http://www.intrade.com/jsp/intrade/common/images/homepage/cachedGraphs/745701.png

The chance as of tonight of raising it by the end of August is similarly 83%
http://www.intrade.com/jsp/intrade/common/images/homepage/cachedGraphs/749123.png

Chance of a US credit downgrade by 2013 is ~60%
http://www.intrade.com/jsp/intrade/common/images/homepage/cachedGraphs/748842.png

Summarizing the crowd: the debt limit will not be raised by August 2 and some checks will be skipped before a deal is eventually struck by the end of August. However the deal will not adequately address the deficit leading a credit downgrade.

[WhoWee]

Does anyone remember this interview - 3 months ago?
http://www.guardian.co.uk/business/2011/apr/19/geithner-shrugs-off-credit-rating-warning

"Tim Geithner, the US treasury secretary, shrugged off warnings from a leading ratings agency about the US public finances as he sought to reassure Wall Street that the world's biggest economy would be able to maintain its highly prized AAA rating.

In a media blitz following the announcement by Standard & Poor's that it had revised its outlook on the US from stable to negative, Geithner said there was "no risk" of a downgrade."

Let me repeat - this was 3 months ago.

[That Neuron]

Many economists are predicting that America will get downgraded from AAA by at least one agency regardless if congress raises the debt limit.

Does that mean we wont get roadside service any more...? Lol

[drankin]

Does anyone remember this interview - 3 months ago?
http://www.guardian.co.uk/business/2011/apr/19/geithner-shrugs-off-credit-rating-warning

"Tim Geithner, the US treasury secretary, shrugged off warnings from a leading ratings agency about the US public finances as he sought to reassure Wall Street that the world's biggest economy would be able to maintain its highly prized AAA rating.

In a media blitz following the announcement by Standard & Poor's that it had revised its outlook on the US from stable to negative, Geithner said there was "no risk" of a downgrade."

Let me repeat - this was 3 months ago.

Is anyone else getting the idea that these guys don't know wtf they are doing?

[WhoWee]

Is anyone else getting the idea that these guys don't know wtf they are doing?

This was 2 years ago: my bold
http://www.freerepublic.com/focus/news/2262284/posts

"China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March, but some analysts believe China's total U.S. dollar-denominated investments could be twice as high.

"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

The Beijing-based Global Times greeted Geithner by publishing a survey of Chinese economists who called big holdings of U.S. debt "risky."

Geithner renewed pledges that the Obama administration would cut its huge fiscal deficits and promised "very disciplined" future spending, possibly including reintroduction of pay-as-you-go budget rules instead of nonstop borrowing. "

[WhoWee]

I'll give turbo credit for this - if he so desires? Turbo pointed out in another thread that SS holds nearly $3 of the $14.3Trillion US debt.

http://www.politifact.com/virginia/statements/2011/jul/08/george-allen/allen-says-china-owns-more-us-bonds-americans/


"The national debt stands at $14.3 trillion. Nearly $6 trillion of that is held by the Federal Reserve and U.S. government agencies in various funds such as the Social Security Trust Fund.

The rest of the amount, about $8.3 trillion, is "privately-held" debt owed to mutual funds, pension funds, foreign investors and other bond holders.

There’s no doubt China holds a lot of U.S. government debt. In fact, it’s the largest foreign owner of U.S. Treasury securities.

As of March 2011, China owned about $1.2 trillion of U.S. debt - more than a quarter of the total $4.5 trillion in U.S. treasuries held by foreign investors, according to statistics from the U.S. Treasury Department. But the rest of the roughly $3.8 trillion of privately held debt was owned by United States investors such as banks, pension funds and mutual funds."

Perhaps the adults in the room need to sit down and put a plan together to stop the pocket-to-pocket transfer game - write down the bad investments - and balance the real books? I realize this will require the persons sitting at the table bring more than rhetoric but the outcome could restore our standing in the world.

If all we actually owe China (in Treasuries) is $1.2Trillion - we should pay them off. As for Social Security - let's write off the amounts spent - pay the interest owed - and both increase the cap and the age of eligibility. The $3.8Trillion held by US investors should be re-negotiated and extended with BONUS interest! It's time to think like the Captains of Capitalism.

[AlephZero]

If all we actually owe China (in Treasuries) is $1.2Trillion - we should pay them off.

You don't have any money to pay them off with. Apple Computer now has bigger cash reserves ($76bn) than the US government ($73bn):
http://www.bbc.co.uk/news/technology-14340470

[WhoWee]

You don't have any money to pay them off with. Apple Computer now has bigger cash reserves ($76bn) than the US government ($73bn):
http://www.bbc.co.uk/news/technology-14340470

Obviously - I meant to prioritize their amount and pay it over a few years.

As for the $3Trillion held by Social Security - it doesn't make sense to include this amout in the national debt - when the future unfunded amount is significantly larger. If we write off the Social Security amount - the debt would be reduced by that amount and put us well under the legal cap.

[AlephZero]

Obviously - I meant to prioritize their amount and pay it over a few years.

China is in control of that option, not the US. All it has to do is cut back on buying more T-bonds as the existing ones come due for repayment. The only option the US has to continue its current debt levels (let alone increase them) is to keep issung new bonds to fund the repayments of the old ones as they mature. If China isn't prepared to "recycle" its debt and buy new bonds for old, you have to find somebody else to take up the slack. That means either US interest rate rises, or dollar devaluation (and the dollar has already devalued more than 50% against the Swiss Franc over the past 12 months - I wonder what that tells you about where smart and rich US ciitizens have put their money already.)

Given the noises from China about "the effects on the rest of the world when the elephant and the donkey fight", it's quite likely they will cut back anyway, regardless of what political nonsense the US comes up with to paper over the cracks. Sure, that will hurt Chinese exports to the US, but big deal. China isn't a democracy. It doesn't have a political system where the first (or only) priority of everybody in the system is to get re-elected.

If you want to have a trade war, starting with foreign reserves of +$X Tn is a better place to be than starting with -$X Tn...

[WhoWee]

China is in control of that option, not the US. All it has to do is cut back on buying more T-bonds as the existing ones come due for repayment. The only option the US has to continue its current debt levels (let alone increase them) is to keep issung new bonds to fund the repayments of the old ones as they mature. If China isn't prepared to "recycle" its debt and buy new bonds for old, you have to find somebody else to take up the slack. That means either US interest rate rises, or dollar devaluation (and the dollar has already devalued more than 50% against the Swiss Franc over the past 12 months - I wonder what that tells you about where smart and rich US ciitizens have put their money already.)

Given the noises from China about "the effects on the rest of the world when the elephant and the donkey fight", it's quite likely they will cut back anyway, regardless of what political nonsense the US comes up with to paper over the cracks. Sure, that will hurt Chinese exports to the US, but big deal. China isn't a democracy. It doesn't have a political system where the first (or only) priority of everybody in the system is to get re-elected.

If you want to have a trade war, starting with foreign reserves of +$X Tn is a better place to be than starting with -$X Tn...

First, who decided to depend on China to finance our Government and secure our retirement and safety net programs?

A little history lesson - after WWII the US refinanced the German and Japanese economies with debt - correct? Had those investments been converted to equity - even 25% - we would be in a much stronger position now. Instead, US companies (autos and electronics for instance) were forced to compete with re-invigorated Japanese and German firms.

Now, politicians pave the way to send our manufacturing base to China (and elsewhere) to lower labor costs (pushed up by unions). The Chinese factories were happy to sell products at break-even to gain market share. As the cash flows out of the US into China - factories close in the US and certain retailers flourish selling cheap Chinese goods. This time we have financed China with manufacturing contracts. As China acquires dollars - we are more than happy to borrow from them to fund our spending. The Chinese are also happy to purchase as many natural resources around the world as possible.

What happens when the Chinese decide not to loan us any more money - or demand a higher interest rate? We already borrow about 40% of our budget - who will loan us money to pay China in the future?

The USA needs a long term plan. IMO - the whole "super power" label has gone to our heads in that unless we plan to not pay our debts - we are in big trouble.

Are the best days of the US in the past or in the future - and what is the definition of "best days"? If best days are defined by full employment and prosperity - the plan must be real - not pie-in-the-sky industries that don't yet exist. If the best days is defined as a welfare state where the wealthiest 1% and the top corporations pay to feed, clothe, house, and provide medical care to everyone else - that plan also needs to be precise.

Hopefully these choices will become clear to voters in the 2012 election - the financial markets are not fooled by political rhetoric as they look closely at the actual numbers.

[WhoWee]

THIS IS A MUST HEAR INTERVIEW!!!

According to Barney Frank - the recent financial reform legislation - in anticipation of a downgrade - removes the federal requirement that AAA securities be liquidated (by pensions for instance) in the event of a downgrade. He stipulated the statuatory requirements have been removed and the regulatory rules are being disassembled currently.

http://video.foxnews.com/v/1087633549001/credit-rating-downgrade-a-done-deal/

[Ryan_m_b]

The USA needs a long term plan. IMO - the whole "super power" label has gone to our heads in that unless we plan to not pay our debts - we are in big trouble.

Are the best days of the US in the past or in the future - and what is the definition of "best days"? If best days are defined by full employment and prosperity - the plan must be real - not pie-in-the-sky industries that don't yet exist. If the best days is defined as a welfare state where the wealthiest 1% and the top corporations pay to feed, clothe, house, and provide medical care to everyone else - that plan also needs to be precise.

Hopefully these choices will become clear to voters in the 2012 election - the financial markets are not fooled by political rhetoric as they look closely at the actual numbers.

IMO the biggest problem with this whole default crisis is that the average person doesn't entirely understand the situation (i.e. how can a country owe money and to who?) and has a bit of a cognitive dissonance believing that the US will always be number-one.

[MarcoD]

What happens when the Chinese decide not to loan us any more money - or demand a higher interest rate? We already borrow about 40% of our budget - who will loan us money to pay China in the future?


Man, don't worry about it. At the moment, China trades goods for paper, and part of that paper is used to buy other stuff like oil. I think it is pretty unlikely that China will get an equivalent amount of goods back, the paper will just devalue.

[Ryan_m_b]

Man, don't worry about it. At the moment, China trades goods for paper, and part of that paper is used to buy other stuff like oil. I think it is pretty unlikely that China will get an equivalent amount of goods back, the paper will just devalue.

Errr what? China has US bonds and you have a large debt with them. Modern economies rely on being in a constant state of debt and lending, if suddenly people wont lend to you or ask for a higher interest rate you're going to suffer.

[MarcoD]

Errr what? China has US bonds and you have a large debt with them. Modern economies rely on being in a constant state of debt and lending, if suddenly people wont lend to you or ask for a higher interest rate you're going to suffer.

I misunderstood it I think, must have been thinking about something else.

As far as I know bonds are traded in some manner on the free market. If China suddenly stops buying, I guess interest rates would suddenly drop increase. Otherwise, interest rates I guess will remain the same - they don't determine interest rates, the market does.

Is it possible that if China doesn't buy back bonds not enough bonds can be sold and US government defaults because they don't receive money from the market? I actually have no idea. Negative interest rates? Deflation? Is it even possible for China not to buy back bonds? Where would all the money go, in ships from the US to China? I really have no idea.

But as far as I know, all that money abroad has nowhere to go, and China has no interest in suddenly destabilizing the market.

[Ryan_m_b]

I'm not an expert either but start here (http://en.wikipedia.org/wiki/Bond_(finance)) and work your way through if you want to know more. Whilst I'm sure China doesn't want to destabilize the market it's not really under their control. The US owes many countries money (Including the UK). Defaulting means that the US will miss a payment, this will have huge obvious knock on effects such as the companies/countries relying on that money coming in not being able to pay for stuff either. The result will be that the US has it's credit rating reduced meaning people will be less likely to lend it money and would do so at higher interest rates.

[MarcoD]

I'm not an expert either but start here (http://en.wikipedia.org/wiki/Bond_(finance)) and work your way through if you want to know more. Whilst I'm sure China doesn't want to destabilize the market it's not really under their control. The US owes many countries money (Including the UK). Defaulting means that the US will miss a payment, this will have huge obvious knock on effects such as the companies/countries relying on that money coming in not being able to pay for stuff either. The result will be that the US has it's credit rating reduced meaning people will be less likely to lend it money and would do so at higher interest rates.

I never thought, and still don't think, that they will default, so this is just academic interest.

If we don't generalize anymore on national terms (getting tired of the US/China divide, China banks just hold 1Tn I thought), but think in terms of banks, financial institutions, private investors and companies: would the interest even go up that much?

Most institutions/small time investors can find other places to go with their money, but does the same hold true for banks or big funds?

I mean, are all the international banks not just that much tied up in US debt that they have no other option than to (re-)buy US debt with their dollars, no matter what? Or even, does an informal agreement exist between all these banks that it is just better to roll over debt of the US because of the consequences if they don't? They have a lot to lose if the US economy stalls, and suppose one of them owns several hundreds of millions of US debt, what could it do with it? Buy gold? They would suddenly need to find another market which would be big enough and deliver the same yield, and they would need to do that fast - money just standing around loses value.

Maybe losing AAA doesn't mean anything.

If the amount of money 'fighting' to be reinvested hardly changes, the interest rates can't change. If the amount of money, next time US debt is rolled over, suddenly dramatically changes -even if they strike a deal, but banks find it now necessary to reposition- I guess interesting times are ahead anyway.

[Ryan_m_b]

I never thought, and still don't think, that they will default, so this is just academic interest.

We'll see, there is a real and frightening chance that they will.

If we don't generalize anymore on national terms (getting tired of the US/China divide, China banks just hold 1Tn I thought), but think in terms of banks, financial institutions, private investors and companies: would the interest even go up that much?

Most institutions/small time investors can find other places to go with their money, but does the same hold true for banks or big funds?

I mean, are all the international banks not just that much tied up in US debt that they have no other option than to (re-)buy US debt with their dollars, no matter what? Or even, does an informal agreement exist between all these banks that it is just better to roll over debt of the US because of the consequences if they don't? They have a lot to lose if the US economy stalls, and suppose one of them owns several hundreds of millions of US debt, what could it do with it? Buy gold? They would suddenly need to find another market which would be big enough and deliver the same yield, and they would need to do that fast - money just standing around loses value.

Maybe losing AAA doesn't mean anything.

If the amount of money 'fighting' to be reinvested hardly changes, the interest rates can't change. If the amount of money, next time US debt is rolled over, suddenly dramatically changes -even if they strike a deal, but banks find it now necessary to reposition- I guess interesting times are ahead anyway.

Essentially it will make borrowing a lot harder for the US and increase it's debt. Whilst it is true that it is in no-ones interest to see the US economy stall (well actually I would dispute that, many countries could see a boost by filling the gaps that the US leaves) that doesn't give the US a get-out-of-jail-free card.

The institutions and countries that hold US debts might need that money, it's not a case of "don't worry about it I know you're good for it". For example;
Alice lends Bob 10 credits in return for an IOU. Alice then wants to buy 10 credits of goods from Carol and so gives Carol Bob's IOU. If Bob suddenly can't pay both Alice and Carol are in trouble and in future Alice will be less inclined to lend to Bob and Carol will value a Bob IOU less. So yes the US is a huge part of the global economy and there would be dramatic consequences if it defaults, the result will be repercussions in the market as people's money vanishes (a good example would be the US troops in Afghanistan who may not get paid next month) and in the future the US takes an ever decreasing roll on the global stage. If the US defaults and gets it's credit rating down rated businesses will move to other countries where their money is safer.

[SixNein]

IMO the biggest problem with this whole default crisis is that the average person doesn't entirely understand the situation (i.e. how can a country owe money and to who?) and has a bit of a cognitive dissonance believing that the US will always be number-one.

In addition to the above, many people seem to believe that America's budget and economic problems have 'obvious' solutions. But I don't see anything obvious about these problems. Some people think we should 'obviously' make deep spending cuts, and others think we should 'obviously' stimulate the economy. There is nothing obvious about either decision, and there is nothing obvious about how much one should pursue the path of either choice. Either path in my mind comes with substantial risk and uncertainty.

Just take the topic of a tax cut stimulus. Many will argue that tax cuts are the best way to stimulate the economy, but how can they be so sure? A great deal of our consumer goods are from foreign lands, so tax cuts may stimulate foreign economies instead of the American economy. We went with substantial tax cuts to stimulate the economy without ever asking important questions; as a result, we may be subsidizing economic growth in China instead of America.

In my mind, the largest problem America has right now is its lack of production. America is by and large a financial economy that just suffered a major financial collapse, and we don't have a backup plan. So how do we recover from this situation?

[WhoWee]

THIS IS A MUST HEAR INTERVIEW!!!

According to Barney Frank - the recent financial reform legislation - in anticipation of a downgrade - removes the federal requirement that AAA securities be liquidated (by pensions for instance) in the event of a downgrade. He stipulated the statuatory requirements have been removed and the regulatory rules are being disassembled currently.

http://video.foxnews.com/v/1087633549001/credit-rating-downgrade-a-done-deal/

Did anyone listen to this interview with Barney Frank? Apparently (and contrary to rhetoric -a reference to Geithner comments just 3 months ago), the Dems have anticipated a downgrade (for about a year?) and took steps in the finance Bill to offset some of the damage.

[Ivan Seeking]

Did anyone listen to this interview with Barney Frank? Apparently (and contrary to rhetoric -a reference to Geithner comments just 3 months ago), the Dems have anticipated a downgrade (for about a year?) and took steps in the finance Bill to offset some of the damage.

He was talking specifically about municipalities [and I think some States]. And what's news isn't the downgrade of some bonds, it is that the Fed is not requiring an automatic sell [by the banks] due to a downgrade. Arguably some of these bonds should have been downgraded long ago, so in practical terms, a downgrade does not mean there is an increased risk.

[WhoWee]

He was talking specifically about municipalities [and I think some States].

listen to the entire interview - he also references pensions/funds.