the sound of a bubble popping?

NEW YORK - SEPTEMBER 14:  U.S. Rep. Barney Fra...
Rep. Barney Frank of Massachusetts

Today, Standard & Poor’s and Moody’s Investors Service warned that the United States government is in danger of losing its AAA credit rating, the highest possible rating a large institution can hold. According to Taylor Graff at Cavanaugh Capital Management, the AAA rating is the “pinnacle of safety in the investment universe.” It means, or meant until at least recently, that returns for investors were all but certain.

With the federal debt increasing in dramatic leaps and bounds, however, the ratings agencies–organizations which assess the rating to determine how much risk an investor will face by an investment–are questioning whether the U.S. will remain a safe investment in the future. Naturally, the New York Times spins this that Wall Street is “listening” to the Tea Party.

Is Wall Street listening to the Tea Party? […]

It was not the first time the agencies,Standard & Poor’s and Moody’s Investors Service, warned that the nation’s gilt-edged rating might fall into jeopardy.

But the two statements, made within hours of each other, were seized on by deficit hawks as further evidence that the government must reduce spending and debt to avert disaster. That is just what many Tea Party supporters insist.

On the contrary, isn’t it more likely that the Wall Street economists and actuaries are crunching the numbers and are making public the conclusions that have rolled out of Wall Street over the last three years? I’ve mentioned before the conclusions of the Weidemers in their books America’s Bubble Economy and Aftershock: Protect Yourself and Profit in the Coming Global Meltdown. We watched some of the largest financiers in America, and the world, go under in the last few years, even after boasting an AAA credit rating, themselves (check out Andrew Ross Sorkin‘s Too Big To Fail for a great day by day history of that catastrophic period on Wall Street). And we know that there is literally no way that the United States can ever pay off its debt without dramatically increasing taxes, dramatically cutting services, or dramatically increasing productivity in the private sector (and thereby creating a dramatic increase in tax revenues). We’re talking a productivity increase that the United States work force has not seen in decades and definitely not in my lifetime.

In short, we have seen what happens when organizations over leverage themselves (or take on too much debt), and we know that the results are not pretty.  It’s been since the early 1980s that the U.S. government last paid off its debt, and the current trend is to punt the problem down the road. But can it be punted forever?

The debt the U.S. government relies upon to keep its doors open is dependent on investors willingness to loan the government money. That willingness is in large part dependent on keeping the rating at AAA. Even dropping the rating a notch could require an increase in the amount paid on the debt each year, which payment itself would cause a higher level of debt just to cover the increased interest payments.

The current concern by the credit rating agencies stems in large part from two things: 1. the December compromise between the Obama Administration and Republican lawmakers over the fate of the Bush Era tax cuts, and 2. the unwillingness of any lawmakers to implement wide-reaching budget cuts, including the lackluster response to a bipartisan commission’s recommendations for cutting $4 trillion last year.

That compromise was likely to act as a stimulus on economic growth — indeed Moody’s raised its forecast for growth this year — but on balance it worsened the nation’s finances, the agency said.

Moody’s also cited the failure to adopt the ambitious measures proposed last year byPresident Obama’s bipartisan commission on debt reduction to shave $4 trillion from projected deficits over the coming decade.

There are few things that more important that lawmakers can do right now than putting aside partisan differences and considering the ramifications of the federal spending and budgeting decisions over the last fifty years. Neither party really has credibility in spending; they just prioritize different spending priorities. Where the left supports expansion of benefits to support the poor and disadvantaged, the right has expanded the budget in education (“No Child Left Behind”), among other things.

Again: there are few things of more immediate importance to the future of our country than getting our spending under control. It weighs down on our economy and will threaten future prosperity. Most frightening, though, is that many people still don’t get it:

“There is a significant risk that we can lose the confidence of our foreign investors within the next two years,” said David M. Walker, former United States comptroller general and founder and chief executive of Comeback America Initiative, an organization devoted to improving the country’s financial standing.

He criticized the rating agencies for underplaying the threat.

“Unless we make some tough choices sooner rather than later, then it’s only a matter of time before interest rates go up significantly and the dollar takes a significant hit.”

That hit will be when investors realize the U.S. government–with politicians continuing to give away something for nothing–is no longer a safe investment and, indeed, with trillions of debt on the books already, may be a sunk cost of lost investment.


2 responses to “the sound of a bubble popping?

  1. Pingback: Have you read “Comeback America” by David Walker? | What they didn't teach in law school

  2. Pingback: Adding up the Federal Balance Sheet | What they didn't teach in law school

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