Skip to content

Dear S&P, Don’t Play Chicken With The Debt Ceiling

April 18, 2011

As Standard & Poor’s (one of the two rating agencies responsible for claiming Collateralized Debt Obligations (CDO’s) were a safe grade A investment) claims that the current level of U.S. debt is only now weakening the United State’s fiscal position, I’d like to remind readers how we got here. Note the flatness of the debt under Clinton, the rise under Bush, and the fact that the steep climb in U.S. debt starts during the beginning of the Great-Recession which also began under Bush. I’m saying this because the debt growth is nothing new… it has been like this for four years, and only now is noticed by the S&P.

Standard & Poor’s, whose great ratings of CDO’s tricked public and private retirement funds, Banks, and Nations to purchase packaged junk while believing the claim it was gold is now claiming that only at this moment in time has the U.S. debt has finally become a fiscal problem. It seems like a political play to me. I would hope that everyone who hears their claim remembers that these same ratings agencies were unable to see the largest financial crisis in the last 100 years. Their ratings actually contributed to the crisis by allowing financial institutions with strict controls on the ratings of (risk-levels) assets they could hold to purchase CDOs, causing the junk to spread and infect much more of the financial system than it otherwise might.

Analysis

No doubt the U.S. debt is heading in a direction which in the long-term is untenable. But it has been for a long time. The timing of the announcement seems highly political as there will be a lot of conversation about the budget prior to 2012 and the start of another election cycle. Remember, the interests of the Standard & Poor’s agencies is tied with their clients (Banks and Financial Companies), so you can bet they wouldn’t say anything they thought might weaken that sector. Hence they contributed to one of the largest bubbles and increases in financial risk in the last century, because it was helping the financial sector go gangbusters. Now they’re entering the debate on our nations debt, do you think they have equally good intentions? So S&P contributes the the economic collapse of America. This was responsible for a decline in government revenues and the tax base, as well as the need for increased spending to strengthen the financial sector. Only now, as the budget debate looms, does S&P decide that what has been a long term trend which is finally being politically addressed has become a problem. The whole thing looks a bit suspect.

Click Here: for more on charts on the U.S. debt and deficit.

Advertisements
6 Comments leave one →
  1. Brian Gonsalves permalink
    April 21, 2011 12:06 pm

    Question: Why even have a debt ceiling of you automatically raise it every time?

    That suggests the debt ceiling was NOT placed there to force idiots across the entire political spectrum to curb their reckless spending. It suggests that the debt ceiling is NOT the threshold beyond which the American economy and its citizens would have real problems carrying the debt load should there be another bump in the road. It suggests the debt ceiling is NOT really the point beyond which American citizens are paying an unreasonable amount of tax just to pay the interest on the debt rather than getting real value for their money.
    In short it suggests that the debt limit is meaningless and should be abolished.

    However if we agree that we do need a debt ceiling for some or all of the reasons listed above, then surpassing it, or better yet approaching it, should definitely trigger some serious, immediate and unavoidable consequences. Consequences exactly like automatic tax increases and spending cuts across the board. Consequences that tax payers and tax spenders alike will be unable to ignore and that translate directly into harsh treatment at the voting station.

    If threatening to, or even forcing, loan default is the short term economic agony to get those same morons to make the necessary laws then I say do it. The US government is NOT too big to fail and anyone who tells you different slept through the entire 2008 recession. I say better to deliberately fail the US economy now when it still has the capacity to recover than wait until it fails on its own when that capacity no longer exists.

    • April 21, 2011 1:23 pm

      “The US government is NOT too big to fail”

      Sometimes people take their ignorance and place it on display for everyone to see. Comments such as this make my job easier, because I realize for some people its not worth trying to explain things. Of course, we could settle down and have a nice conversation about what “failing” means, and the ramifications for the U.S. and Global economy (not to mention the geo-political side)… ect… but I think the effort would be wasted.

      I’ll remind the original poster that the debt ceiling is an absolute number, while the Debt to GDP ratio is relative. As GDP grows, it makes sense the debt ceiling would rise. I’ve talked at length about some of these issues related to debt in other posts so I’m not going to say too much more here (there are links on the side and a search feature). Just remember that under uncle Ronnie Reagan we also saw the Debt to GDP ratio sky rocket, then under Bush Junior it shot up again… no little chickens ran around crying “the sky is falling the sky is falling”. For some reason now they all come out of the hen-house and don’t see the hypocrisy. All this is as easy to see as looking at a historical chart, so there is no conjecture in my statement.

    • April 21, 2011 8:49 pm

      For additional charts and other posts on the subject, please see the post from today: “Historic Chart of U.S. Debt to GDP Ratio”

  2. Brian Gonsalves permalink
    April 25, 2011 4:27 pm

    You focus on 1 statement “The US government is not to big to fail” and ignore everything else I said. OK let’s talk about that.

    Do you believe that if the US debt keeps climbing as it currently is that there will be much of a US economy in 25 years? The US tax base is not large enough to do it and not growing anywhere near that fast. Do you believe that the US economy will miraculously grow faster than the interest on the debt? It is not doing that now so please describe to me this economic miracle in broad strokes. Right now it’s looking far more likely that US citizens will be paid in Pacos or Looneys in 25 years and the US greenback used for toilet paper because ass wipe will be more expensive to buy.

    Something drastic needs to be done now when there is still economic room to maneuver. When you have a debt load so big covering the interest is difficult then you have a problem. When that debt starts growing by itself with no return on the “investment” and politicians are too cowardly to act to mitigate this then you are in deep trouble. Do you really think the US is somehow above the same economic rules that govern every other economy in the world?

    Do you think Iceland wanted to declare bankruptcy? Ok there were other economy’s big enough to bail out Iceland. So who is big enough to bale out the US economy? Yes the US economy is different from Iceland in so far as it’s probably too big for the other economies to rescue.

    Do you believe that the politicians in Washington will suddenly come together and develop the brains and the courage to reverse course before the debt collapses the entire economy on insane interest payments. That would mean tightening the voting public’s belt which is very likely political suicide. They would need some reason, some motivation that is worse than potential political suicide before they would be willing to risk. More likely the final crash will be inevitable, visible to all, before they would be willing to act on pointless last ditch austerity measures. We’ve seen that elsewhere. Why would you think the politicians in the US are somehow smarter and more courageous than the ones in Iceland etc. Yet another miracle?

    Too big to fail is a steaming pile of fly infested cow pie. If you fly an economic entity into the ground the ground will NOT get out of the way no matter how big you are.

    You are right about one thing. Trying to explain to someone too far behind in the lesions free market economy’s and recessions teach is an exercise in futility. They will forever be stunned that the ground did not leap nimbly aside when their cherished too big to fail comes crashing down.

    • April 28, 2011 10:50 am

      “Do you believe that if the US debt keeps climbing as it currently is that there will be much of a US economy in 25 years? “

      The whole proposition for your post is a misnomer. No one believes that the US debt will keep climbing at the rate it currently is for 25 years. And as I’ve mentioned… it is not debt, but the debt to GDP ratio that matters, anyways. Look at the post I did after your first comment, you will see a big jump in the debt to GDP ratio at the end of Bush presidency as his temporary policies designed to bailout the banks and his buddies are enacted… and as the GDP falls due to the recession. These are temporary effects due to temporary economic factors. You will note that the earlier debt to GDP growth rate during his presidency was much flatter. It still grew despite Clinton’s balanced budget because Bush Jr. irrationally “payed” for his wars with tax cuts (I’ve discussed this in other posts), but even then it grew at a much slower rate implying that the debt issue is not as urgent an issue as the talking heads in DC have convinced you, so that they can slash the social security and medicare benefits you’ve been paying for.

      “Do you believe that the US economy will miraculously grow faster than the interest on the debt?”
      Yes, a one year T-Bill has a 0.2% interest rate while the maximum 30-year T-Bill has a 4.4% interest rate. Most T-Bills hang around the 10 year range with a 3.3% interest rate. The average U.S. GDP growth rate from 1947 to 2010 was 3.3%. So with GDP growth rates within a realistic historic range, it is entirely possible to pay the interest. Now imagine what we could do to pay off the debt (not just the interest) if we wound down the Wars or cut other discretionary spending just a little. In fact under Clinton’s presidency, the projected FY2015 Budget surplus would have entirely paid off the entirety of U.S. debt with some to spare.

      On a side note:
      It’s funny you’re comparing the US defaulting on its debt to Iceland. That’s like comparing GE declaring bankruptcy to a local corner store going out of business.

      And as for:
      “If you fly an economic entity into the ground the ground will NOT get out of the way no matter how big you are…They will forever be stunned that the ground did not leap nimbly aside when their cherished too big to fail comes crashing down.”

      This metaphor makes no sense. If anything you are recommending that the airplane crash into the ground because trying to figure out where the airport is is a task too complicated for you to figure out.

Trackbacks

  1. Just a Thought on the Debt Compromise Debacle « floodingupeconomics

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: