The Impact of a Potential Downgrade on the United States Credit Rating

[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/busin...s-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/busin...s-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 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.

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]

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]

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 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 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%.
[PLAIN]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%
[PLAIN]http://www.intrade.com/jsp/intrade/common/images/homepage/cachedGraphs/749123.png

Chance of a US credit downgrade by 2013 is ~60%
[PLAIN]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 won't 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/...llen-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 amount 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.