Monday, April 18, 2011

U.S. Credit Outlook Cut by S&P on Deficit Fears

This could be big.  S&P have not yet cut our credit rating (which is AAA, the highest) but they have signified that there is a 1-in-3 chance of that happening in around the next two years.  For now, they have switched their outlook on our long-term credit outlook from "stable" to "negative".  I have a lot of feelings about this.  The key reason is, obviously, the growing inability of our "leaders" in Washington to deal with our consistently ballooning deficit.  It has become a big political game, with each side having its respective targets.  I blame the Republicans more than the Dems, since they have long held the mantle of being "fiscally conservative", although their actions put a lie to that.

I'm reminded of Bill Maher's show on HBO, which I religiously watch every week; in fact, it's the closest thing to a news program on television that I watch regularly.  Anyway, he has been talking about the budget lately, due to the government nearly shutting down a few weeks ago.  He has a neat way to show his feelings on it.  He shows a mock dinner tray, with big helpings of fried chicken, macaroni & cheese, and mashed potatoes.  On the margin of the tray, is a little thing of paisley or some kind of vegetable, it's barely visible.  The big helpings of chicken, mac & cheese, and potatoes are meant to symbolize the big three government programs: Social Security, military, and Medicare/Medicaid.  Maher's point is that the Republican Congress refuse to touch any of these big programs, even consider cutting them.  Instead, they go after the little vegetable design on the side of the tray; the little vegetable is supposed to symbolize things like Planned Parenthood, the EPA, the NEA.  In short, NPOs and federal agencies that Republicans hate, but yet take up a tiny sliver of federal spending, especially compared to the Big Three programs.

Obviously, a downgrade in our credit rating by S&P would further degrade our status as an economic superpower.  I think this news will make it clear to Washington that it is time to get serious and make some real cuts.  There is no more time for political bullshit.  This brings up two nasty and undesirable choices.  First is making deep cuts to the Big Three programs; I expect that the so-called "entitlement" programs (SS & Medicare) will take the brunt of it, with military spending left largely unscathed.*  Cutting these benefits will be nothing short of catasphoric; any possibility is on the table, including riots, attacks against the government, you name it.  The other alternative is really putting us into uncharted territory and might be even worse: a sovereign superpower defaulting on its debts.  The coming attractions in this scenario might include hyperinflation and much-needed resources (yes, I'm looking at you, oil) being withheld by exporting countries.  Or...they could just do neither and keep printing.  Yeah, I think that's actually more likely than the first two scenarios.  I don't think these people know how to do anything else.

Another development listed in this article that gave me pause was that PIMCO, the world's largest bond fund, sold all its U.S. treasuries.  Their chief finance officer stated that he feels that the U.S. will eventually lose its AAA credit rating.

What also caught my interest, and makes me rethink the motives of these ratings agencies (albeit slightly) was that just last week, a U.S. congressional report was published that blamed ratings agencies like S&P for triggering the financial crisis by giving inflated credit ratings to places like AIG.  This could be a way of payback from S&P but I kinda doubt it. 

*I don't intend this statement to mean that I'd welcome a cut in military spending.  Don't get me wrong, it's much needed  But the outcome would still be undesirable.  Closing bases and sending troops home would result in an even larger pool of unemployed people.  A large group of disenfranchised, jobless soldiers would be a very dangerous thing, indeed.

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