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The S&P Downgrade of US Debt: What it Means
Much verbiage is piling up on this issue. Yet, it matters little that the two other giant rating agencies did not downgrade US debt as S&P did. It is likewise unimportant that all those agencies deserve the bad reputations won when their over-rating of securities burst in the collapse of 2007 and took an already unbalanced economy into deep recession. Nor does the downgrade impose major cash costs anytime soon.
The S&P downgrade is important because it clarifies and underscores two key dimensions of today’s economic reality that most commentators have ignored or downplayed. The first dimension concerns exactly why the US national debt is rising fast. There are three major reasons for this: (1) major tax cuts especially on corporations and the rich since the 1970s and especially since 2000 have reduced revenues flowing into Washington, (2) costly global wars especially since 2000 have increased government spending dramatically, and (3) costly bailouts of dysfunctional banks, insurance companies, large corporations and the economic system generally since 2007 have likewise sharply expanded government spending. With less tax revenue coming in from corporations and the rich and more spending on defense/wars and bailouts, the government had to borrow the difference. Duh!
The second dimension concerns the “deal” just agreed between President Obama and the Republicans in Congress. That deal promises further major increases in the national debt in the years ahead. That is because it does not alter any of the three major debt causes listed above. The political theatrics of the two parties reflect the money/power of the corporations and the rich, keeping their tax cuts, subsidies, and government orders untouched. Instead, the two parties pretend concern about the debt, debate only how much to cut government spending on the people, and focus on the 2012 election.
S&P downgraded the US national debt because these economic and political dimensions of the US today guarantee a worsening of the nation's debt. Thus, a basically political problem is looming for those lenders who purchased and now own the debt obligations of the US (i.e. Treasury securities). The political problem is this: how long will the mass of Americans accept not only an economic crisis bringing unemployment, home foreclosures, reduced real wages and job benefits, but now also cutbacks in government supports? When will the political backlash explode and how badly may it impact the creditors of the US?
When might that backlash demand that the people’s taxes stop going to pay off creditors (corporations, the rich, and foreigners) and be used instead for public services that the people need? Exactly that political danger for creditors prompted the rating downgrades for the debts of Greece, Portugal, etc. The same danger has now reached our shores and confronts our nation'a creditors.
S&P decided – for reasons good and bad, noble and venal – to say what any reasonable observer knows (given that such backlashes hurting creditors have often happened in recent history). Creditors need to worry about the combination of economic crisis, growing inequalities of wealth, income and power, and political dysfunction that now defines the US. The risks of backlash against creditors rise with the national debt. Not to worry is irrational and dangerous for them. And for us?
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23 Comments so far
Show AllYes, the S&P downgrade is important but, our largest creditor China downgraded the US last November. "The Dagong Global Credit Rating Company, which lowered the United States to A+ last November after the U.S. Federal Reserve decided to continue loosening its monetary policy, announced a further downgrade to A, indicating heightened doubts over Washington's long-term ability to repay its debts." People in the know knew! Now the masses who watch the DOW on CNN know.
The bigger issue is the general unraveling of the world financial system. Greece is going to selectively default. Italy - Belusconi, just last Wed.: "Our economy is solid," he said. "Our banks are solid. They are well-capitalized. They have liquidity. They have overcome the stress tests." Belusconi sounds like Mc Cain in '08, '...The fundamentals of the economy are strong...'. A day or two later we experienced the crash of '08.
More borrowing by debtor nations only services debt. More and more sovereign borrowers are being seen as not having the ability to EVER payback the capital borrowed. The willingness of citizens of debtor nations to EVER pay back loans is coming into question.
The smartest guys in the room miscalculated again. Bush was still in office when the '08 crash happened. I'm sure the plan was that he'd be long gone. Today we are back to financial musical chairs. While the music was playing the market was pumped up yet again. From 7K in '08 to nearly 13K recently. The rise was all smoke and mirrors as usual. The music stopped sooner than planned. The 'budget deal', (major cuts in federal spending - $2.1 trillion), is going to crash the market within six months if not sooner by definition. This was supposed to happen before the election of '12. Maybe we should all be thanking the Tea Party.
We live in interesting times and dangerous times.
"More and more sovereign borrowers are being seen as not having the ability to EVER payback the capital borrowed. The willingness of citizens of debtor nations to EVER pay back loans is coming into question."
Please go to Warren Mosler's website, where an important new school of thought, Modern Monetary Theory is explained. There you'll learn that sovereign borrowers like the US that controlls its own currency can never default on its own deficit and can always pay back what it has borrowed - because the federal government borrows from itself! And the US deficit has little to do with whether US citizens are willing (or able) to pay back loans, except insofar as it affects the real economy and employment and spending rates. Federal deficits are a good thing because they mean the government is spending and pumping into the economy the gas that it needs.(some of it, anyway)
The government's dept dynamics are perfectly stable and could only be destabilized by an event - war, revolution, etc. - that threatened the stability of the gov't itself. Gov't debt is a matter of accounting, pure and simple, taking dollars out of one pocket, the Federal Reserve, and putting them into another, the Treasury. These dollars have no material existence since the US went off the gold standard in 1971. They are not tied to the number of gold bricks in Fort Knox; they are not things or commodities, any more than the points on the scoreboard at a football game are. As Warren Mosler points out in his book, "7 Deadly Innocent Frauds", if a citizen pays his taxes in cash, the "greenbacks" are collected and then put in a shredder, and a data entry operator enters the dollar number onto the gov't's spreadsheet. The purpose of the taxation has been completely fulfilled: taking away some of the citizen's spending power to help prevent inflation and an overheating economy, not lending the government dollars to spend. This is why Mosler advocates cutting taxes in the present stagnant economy: the population's spending power must be increased so the rate of buying and selling of real goods and services is increased, leading to job creation.
Sounds like you are making your own Kool-Aid. More tax cuts on the job creators, etc... Complete BS. Unfunded wars and cutting taxes is how we got here. Keep digging the hole deeper. Maybe you will hit China.
I want to add a bit -- which I know Prof. Wolff is aware of even if not mentioned here. Outsourcing has raised the level of unemployment, and consequently the tax revenues. By financialization and shifting the producers of real wealth -- the stuff people buy -- from US manufacturing to overseas, such as nations like China, there is a net flow of real wealth out of the US.
Agreed Blue Pilgrim. Your screen name brings to mind Kurt Vonnegut, Billy Pilgrim being the name of one of his more famous characters.
Twenty one years ago, in his novel Hocus Pocus, Kurt Vonnegut depicted the economic hollowing out that you describe. Vonnegut had a prescient awarenes of the increasing redundancy of the American working class under global capitalism. That theme recurs in many of his novels.
That should have been "consequently the tax revenues [have gone down]".
Hollowing out --- reminds me of "we are the hollow men, we are the stuffed men. Leaning together Headpiece filled with straw, Alas!" from T.S. Elliot. The poem ends "This is the way the world ends. Not with a bang but a whimper."
If you want to see the undercurrents, look to the great authors, poets, and writers.
'The best lack all conviction, while the worst
Are full of passionate intensity.'
_ W.B. Yeats
History has shown that the working class can absorb much pain and still not rebel. This can take place when the state has such powerful tools of repression that the working class is afraid to rebel, or when the state has done such a thorough job of brainwashing the population to believe that any rebellion would be futile and only lead to more pain. The USA today has both of these powerful tools at its disposal. It has a dumbed down population that is scared of its shadow. Standby for the elites to continue to grind the people down. Look at those exploited by the rich world in the Third World to see just how far down our standard of living may have to go before (and if) we're prepared to challenge the system itself.
But often the masses rebel anyway.
Millions of people in the US are not dumbed down. All they need are successful examples of rebellion.
Tools of repression do more than just instill fear. The infiltration and co-option or destruction of mass based organizations is a specialty of the US intelligence/law enforcement system. More than ever we need real organization to channel people's anger into action.
I think the fear is often more pronounced among co-opted reform groups than in the population in general. This leads to ineffective or counter productive platforms, strategies and tactics in relation to mass organizing.
We need new organizations and a new movement, badly.
They need attainable goals, or at least goals they believe are attainable, and an inspirational leader.
Can you suggest an attainable goal?
Many folks are not simply scared to rebel _ they have willingly and knowingly jointed The Other Side, believing that this lets them share in its power, and motivated by their contempt for what they perceive as 'The Left.' This is the situation that needs addressing.
Aren't countries that have a wide split between the rich and poor unstable and subject to revolution?
No.
Nothing will change until US oligarchs, our overlords, the investor/creditor class, the uber-rich and their factotums, fear for their safety, not merely their net worth.
Brilliant! Well done Richard. Concise and done in understandable language of the masses. Shame on the so called news services of this country. Dumb is as dumb does.
The S&P downgrade is a joke. Some investment banks had a AAA rating before they tanked. Watch "Inside Job", narrated by Matt Damon on Starz On Demand.
What does the downgrade mean? It means that the tool (Standard and Poors) of the wealthy ruling elite has threatened the governing puppets to impose more austerity measures on the vast majority of the population.
What does the downgrade mean? It means that the tool (Standard and Poors) of the wealthy ruling elite has threatened the governing puppets to impose more austerity measures on the vast majority of the population.
We need a little marxist insight here. Clearly the capitalist class is using the S/P--which they own-- to squeeze the US government and politicians for not doing what it wants fast enough or deep enough! Which is to turn America into a banana republic with a few rich Bourgeoisie and millions of low-wage slave proletariat far poorer than they already are. It is clearly a Dickensonian agenda akin to the 401K scam and the union busting of Wisconsin and Ohio, etc.
Obama is the Trojan Horse in this fiasco. And the people will be the losers if they don't figure this out. And I am assuming they won't. Sadly, the data bear that fact out. Obama is conning most liberals and so called progressives and they are falling for it.
Food stamps anyone?
Let's see if we've got this straight. The financial fuck ups in New York are calling the political fuck ups in DC a big bunch of fuck ups! But the political fuck ups are calling the financial fuck ups, fuck ups because they missed an $8 trillion housing fuck up! While all of this is going on, the political fuck ups are waging two fucked up unfunded wars by stealing money from social security and borrowing money from a communist country! Boy, this really is fucked up! And so, on top of all these other fuck ups, enter the county's largest fuck up (President Zero) who wants to appease his sugar daddies, the financial fuck ups, by getting the political fuck ups who kiss his, I mean support him, to appease the political fuck ups of the other wing of the same fucked up corporate political party, so that he can fuck up Social Security, Medicare, Medicaid, the US Military and everything else that this country owns by selling it all to the financial fuck ups. Boy, this is giving me a fucking headache! Well, I can only see one solution to this fucked up problem of ours. First you get the highest paid financial fuck up to stand in a subway station in New York. While the highest paid political fuck up stands in a subway station in DC. Then we get all of the financial fuck ups to join hands stretching south towards DC, while at the same time, we get all of the political fuck ups to join hands heading north toward New York. 114 miles later (approximately half way) the last political fuck up and the last financial fuck up meet and join hands connecting the chain. At this point, the final solution for this country's great fuck up is at hand as the top paid financial fuck up and the highest paid political fuck up step down off of the subway platform on to the third rail of the the subway system in their respective cities, thus closing the worlds largest human electrical circuit. Hell, this fuck up will probably blow out the entire US electrical grid. But what the hell, it will be the biggest fuck up of their fucked up careers!
well said
fuckin ay