Note: be sure to see more updates below
UPDATE II – Bachmann calls for Tim Geithner’s resignation:
This will affect you.
Moody’s said it was going to hold off for a while but after this they may follow suit.
Unsecured credit will be more expensive. This means those who use short-term loans such as farmers, import/exporters etc will pay more. It means that interest the USA pays on the debt will go up, costing up to $110 billion a year and there will be other impacts.
[Note: This was released late on a Friday night. Releasing at this time skips the weekday news cycle and my Monday there will be other big news to report. As a result most people will not see this in the news therefore it will have less of an effect on Obama.]
FLASHBACK: ‘No risk’ USA will lose its top credit rating, says Treasury’s Geithner…
· We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
· We have also removed both the short- and long-term ratings from CreditWatch negative.
· The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics. · More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
· Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
· The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
The message is clear, the cuts are not good enough, and if we spend more than the current cuts (which are actually not cuts at all but planned decreases in the increase of spending) we will get lowered again. As IUSB Vision readers are well aware, we have a history of enacting spending cuts down the road that are reversed by a later Congress.
Our revised downside scenario–which, other things being equal, we view as being consistent with a possible further downgrade to a ‘AA’ long-term rating–features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur.
Expect Democrats to read the first point and say, “See it fell short because we did not increase taxes” but as you can see point five makes it crystal clear. S&P is not threatening our rating if tax rates drop or stay the same, they are threatening to lower us again if we spend more than we say.
We must not forget that the Democrats rejected every that had a real shot of preserving AAA. This latest calamity is very solidly in the Democrats responsibility. I know that leftist partisans will reject that fact, but to them I ask, what plan did the Democrats put up that had a shot of preserving AAA? The Democrats did not put up even one plan that would bring us to the point where we just stopped having yearly deficits even ten years down the road.
Granted the GOP could have fought for a slightly better deal, but the government cannot be controlled from just one House of Congress. This is why elections matter.
The S&P Report linked in the PDF above continues to say that there have only been modest reductions in intended discretionary spending and that the real problems of Medicare and other entitlements have not been addressed. The GOP has put forward a plan that will work, the Democrats have been promising to come out with an entitlement reform plan but have reneged.
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
Analysts say that, over time, the downgrade could push up borrowing costs for the U.S. government, costing taxpayers tens of billions of dollars a year. It could also drive up interest rates for consumers and companies seeking mortgages, credit cards and business loans.
A downgrade could also have a cascading series of effects on states and localities, including nearly all of those in the Washington metro area. These governments could lose their AAA credit ratings as well, potentially raising the cost of borrowing for schools, roads and parks.
UPDATE – Here are the talking points from the NYT and Paul Krugman in reaction to this. Quite frankly their response is a joke and is designed to fool people who are not trained in economics.
It was S&P that had Lehman Brothers rated AAA just a month before they went bankrupt.
The truth: the overwhelming majority thought that the Fannie Mae/Freddie Mac junk paper and the credit default swaps that insured them were backed up by the US Government, and they were, as this was what most of the bailouts were about, but the government decided to pick winners and losers as to who would get bailed out and who would not.
AIG got bailed out in large part so that it could pay Goldman Sachs who it owed a massive amount of cash. Lehmen Brothers did not get bailed out, by and large because they were Goldman Sachs biggest competitor. All too often Bank A would apply for bailout and so would Bank B; Bank B would get bought out by Bank A using TARP funds and then Bank A would give a large donation to ACORN or another Democrat ally.
This is why so many smaller banks got bailout while Lehman Bros was allowed to collapse arbitrarily and capriciously.
JP Morgan/Chase Bank gets bailout money – gives $5 million to ACORN
Top Lobbying Banks Got Biggest Bailouts
How Goldman Sachs gained from bailout of AIG
Goldman Sachs Wins Big In Secret Bailout Via AIG
It was S&P that rated AIG’s credit default swaps as rock solid investments.
The truth: and the US Govt bailed them out and the credit default swaps were paid, just as almost everyone expected would happen, so yes indeed they were pretty solid, they got overextended and the claims could not be paid, so you and I paid them and the Goldman Sachs of the world made megabucks.
Of course, if Fannie Mae had not engaged in the behavior it did; buying high risk loans, pushing banks to issue more high risk loans, issuing junk investments based on those loans, and long term massive internal corruption, all while it was being given total cover by Barney Frank, Chris Dodd, and Barack Obama and Paul Krugman defended them with the zeal of a defense attorney.
The Democrats Financial Regulation Bill doubled down and reimplemented the exact same government policies that started the ball rolling towards mortgage collapse in the first place, e.g. the government forcing banks to give out high risk loans in inner cities. Paul Krugman supported that legislation and this policy and does to this day.
Subprime Mortgage Crisis #2 in the Making?
It was S&P that admitted to making a $2 trillion accounting error (remember, playing with numbers is their core business and reason for being) in advance of the downgrade of U.S. debt.
The truth: and the Dept. of Education has lost over a billion dollars and has no idea where it went, all in all this adds up to a colossal “so what” as is explained further below.
A downgrade in U.S. debt means functionally that U.S. treasury bills are, in S&P’s oh-so-wise opinion, less trustworthy and a greater credit risk to investors. This comes only a day after investors fled the DOW and S&P500 into the safe and waiting hands of…you guessed it: U.S. treasuries. The same treasuries that S&P suddenly finds a more dangerous buy. So what does that say about the stock market, and the S&P500? Perhaps S&P might wish to re-evaluate the credibility of its own market index.
The truth: with every plan to lead to a balanced budget rejected by Democrats for as long as the eye can see, it is a crystal clear message that the government, as long as Democrats are in power, has no intention to pay off the debt, ever. If you don’t think that this makes our Treasury Bills less secure than you are likely smoking something you shouldn’t be.
History has shown that when a nation’s deficits exceed 100% of GDP its currency and credit have a rapid collapse. It happened to Greece as it approached 120% of GDP. It is predicted that it will soon happen to Spain. If you think it cannot happen here please see the previous paragraph.
None of the other ratings agencies are taking the drastic step that S&P has. S&P is all alone in their move to downgrade U.S. credit.
The truth: There is nothing drastic about it, both S&P and Moodys have warned since 2009 that this would happen if the United States continued to burrow like this. They both put out warning after warning. I have written about those warnings and so has the elite media. Moody’s will likely follow suit in a matter of months. Mini-UPDATE – This talking point is a LIE. Egan-Jones Rating Agency downgraded the USA to AA+ on July 16, 2011.
Moody’s Warns, US and UK Closer to Losing AAA Credit Rating
Moody’s to USA: Change Course on Deficit Spending By Mid-July or Else…
When all is said and done, U.S. treasuries are still the safest investment in the world, and it would take either an idiot or someone with a strong political agenda to contend otherwise.
The truth: and that is why so many countries are dumping our debt and buying Gold, Euros, oil futures, etc. Why? The economic policy the Democrats and the Federal Reserve is following reduces the value of the dollar so that the dollars we pay back are worth far far less than the dollars the government burrowed.
The investments are safe IF you consider the mass printing of money to pay those bills and service the debt to be just fine. What good is a 4% interest long-term T-Bill when the dollar loses twice that plus in inflation/devaluing?
China alarmed by US money printing [Note: We have many links like this, This one is from 2009. The recent ones are more strident]
As is often the case Paul Krugman’s talking points that are nothing but a pack of mostly irrelevant half-truths (read lies as half-truths are just lies designed to paint a false picture).
Lastly, it does not matter what you or Paul Krugman things of S&P and Moodys. Slandering them will not change the fact that the interest we pay on debt will go up, local governments will see a major impact, those who use unsecured debt such as seasonal loans for farmers, import/exporters etc will have to pay more and the credit markets will freeze up even worse than they are now. All of this will cause inflation that impacts the poor the most.
It has been well reported that the markets have expected this and have been bracing for it for months so that the impact would not be as immediate, but even the markets meltdown of the last 10 days is an indicator as the market has not behaved like it has of late since Jimmy Carter.
Not since Jimmy Carter! Dow’s losing streak now in ninth day.
So if S&P is so “out there” why would the markets have been preparing for this as expected?
Investors scramble to position for expected downgrade
UPDATE III – Rick Santelli understands basic economics, Ezra Klein does not (what a shock). Listen to what Ezra Klein calls for policy wise. Did you catch it?
UPDATE IV – CHINA: ‘Good old days’ of borrowing are over…
UPDATE V: The latest spin and talking points from the left as of Saturday, August 6.
It amazes me how dishonest the far left will go to paint a false picture. The latest tactic is to snip out every instance of revenue from the S&P report and present it as if the credit rating was lowered because the GOP would not raise taxes.
In essence this is the leftists case -
Blaming the Republicans (Tea Party):
“We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.”
“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.”
Tax Increases Needed:
“It appears that for now, new revenues have dropped down on the menu of policy options.”
“The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them.”
“..if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–“
Here are a couple of opinion pieces in the elite media taking that spin:
Is the U.S. Credit Rating a Victim of GOP Sabotage? – http://finance.yahoo.com/blogs/daniel-gross/u-credit-rating-victim-gop-sabotage-021622372.html
Downgrade turns up heat on Congress – http://money.cnn.com/2011/08/05/news/economy/downgrade_congress/index.htm?hpt=hp_t2
First of all, the attempt to spin the S&P report as a slam on the GOP is debunked by the text of the report itself:
Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.
Second, S&P uses the word revenue several times in the report, but in context they make it clear that what they want to see is a plan that cuts spending with the cuts actually happening, and any revenue enhancing plan actually enhance revenue. Here is the rub, when non-partisan economic realists use the word revenue, this does not always means raising tax rates on wage earners and small businesses as the Democrats define it. There are a number of ways to raise revenue. For example when Bill Clinton signed off on the Newt Gingrich/John Kasich budgets in the late 1990’s this included a temporary reduction in the capital gains tax rate.
In 1997, the Republican Congress passed a tax-relief and deficit-reduction bill that was resisted but ultimately signed by President Clinton. The legislation:
- Lowered the top capital gains tax rate from 28 percent to 20 percent
- Created a new $500 child tax credit
- Phased in an increase in the estate tax exemption from $600,000 to $1 million
And we all know what happened, government revenues shot up in a big way and we actually had a deficit free year.
President Bush and the GOP used this same strategy to increase revenue after the Clinton/Gingrich/Kasich capital gains tax cut expired.
Reducing the capital gains tax rate from 20% to 15% increased capital gains tax receipts by 79% from 2000 to 2004. Cutting the dividend tax rate by more than half–from 39.6% to 15%–increased dividend tax receipts by 35% from 2002 to 2004. And corporate tax receipts have nearly tripled since 2003, reaching $250 billion for the past nine months, 26% higher than the same period last year. (WSJ July 25, 2006)
For anyone willing to read it, the January 2007 Congressional Budget Office annual report settles any debate. Citing the original CBO forecasts of capital gains tax revenue of $42 billion in 2003, $46 billion in 2004, $52 billion in 2005, and $57 billion in 2006, Democrats who opposed the rate reduction in 2003 claimed that the capital gains tax cut would “cost” the federal treasury $5.4 billion in fiscal years 2003-2006.
Those forecasts were embarrassingly wrong. The 2007 CBO report revealed that capital gains and dividends tax collections were actually $51 billion in 2003, $72 billion in 2004, $97 billion in 2005, and $110 billion in 2006, the last two years nearly doubling initial forecasts.
In other words, forecasts in earlier CBO reports were low by a total of $133 billion for the four-year period. (Am Thinker September 11, 2010)
By lowering the rate we increased the revenue. Why is that?
It is the same reason that the Obama Deficit Commission, which was totally ignored by the Democrats, said that the best way to increase revenue is to lower the tax rates, including the corporate tax rate, make the progressive taxes flatter, reform the tax code so that it is easier and less expensive to comply with. Their reasoning is simple, the expense of compliance causes people to resist the tax code, or to often avoid taking action that will be taxable. High tax rates encourage people who have disposable assets/income to just park their money in such a way that it is not taxed. The money just sits there, or is invested in gold, or in China, or is sheltered. This is why “tax the rich schemes” actually transfer the tax burden to the lower middle class and accomplish exactly the opposite of their stated intent. For explanations in great detail of why that is examine the following LINK. Also the tax increase plan put forth by the administration does not target the millionaires and billionaires hardly at all, but guess who it will impact the hardest – LINK?
There are two more ways that this report has been spun. They quote this section of the report on page four:
Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating.
But here is what the left leaves out; immediately above those lines it says the following:
Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.
So what does that mean in English? It means that IF we have a REAL GDP growth of 3% steady and inflation stays below 2% a tax increase can work. But you see that is the problem, those are BIG ifs. Real GDP growth is under 2% and close to 1% in the private sector. Inflation, when measured with the same formula that was used under Carter/Reagan is at almost 10%. This figure also assumes that growth will not be impacted by such a tax increase, and since small businesses and upper middle class wage earners would get hit hardest by the Administration’s proposed tax increase (as we demonstrated above) the impact on economic growth would be substantial.
Some, like the economically incompetent and flamboyantly partisan Daniel Gross who writes in the Yahoo Finance column linked above, simply engage in the most dishonest demagoguery imaginable:
It has long been obvious to all observers — to economists, to politicians, to anti-deficit groups, to the ratings agencies — that closing fiscal gaps will require tax increases, or the closure of big tax loopholes, or significant tax reform that will raise significantly larger sums of tax revenue than the system does now. Today, taxes as a percentage of GDP are at historic lows. Marginal rates on income and investments are at historic lows. Corporate tax receipts as a percentage of GDP are at historic lows. Perhaps taxes don’t need to rise this year or next, but they do need to go up in the future.
Otherwise, the math of deficit reduction simply doesn’t work. And that’s how the deficit reduction deals signed off on by Republican presidents like Ronald Reagan and George H.W. Bush came about.
Yet the action in Washington in the past year has all gone in the opposite direction. President Obama deserves some of the blame. Several months ago, he struck a deal with Congress to make the fiscal situation worse — extending the Bush tax cuts for two more years and enacting a temporary cut in the payroll tax.
Wow it sounds horrible doesn’t it? Can we just tax ourselves into prosperity or is there something missing from Mr. Gross’ assessment?
Today, taxes as a percentage of GDP are at historic lows
That is because government spending as a percentage of GDP is at historic highs. The way that GDP is calculated the formula (which is greatly flawed but that subject is a 40 page term paper) adds governments spending to all private sector consumer, investment, exports minus imports, and capital goods spending – so when government spending goes up by 80% and the tax rates stay the same the percentage of the tax rate to GDP drops. If you simply compare the private sector part of the equation to how much is taxed that paints quite the opposite picture. So in essence, the more the government prints, burrows and spends, the lower it pushes that tax to GDP ratio. In 2007 the yearly deficit was a measly 198 billion, whereas last year just the yearly deficit approached $2 trillion – an increase by a factor of 10. 2010 YEARLY DEFICIT: $2.08 Trillion. That is 10 times higher than the last year Republicans had budgetary control.
Marginal rates on income and investments are at historic lows.
In the 1950’s the top marginal tax rate was 90% and after 1964 the trop marginal rate was lowered to 70% by JFK. So this appears to be true, or is it? Here is what he forgot to tell you. Back in those days almost every transaction was a cash transaction. It is very easy to keep cash transactions off the books and they did not have computers tracking things like we have today. The simple fact is that there was massive tax noncompliance. If you were going to have to pay 90% tax on doing a business transaction why would you do it? People just cheated and did not report many of their transactions. Much of the private sector did this as a matter of survival to stay competitive. The fact is that we pay much more now than we did before because compliance is much higher than it was back then. Also Mr. Gross looks at only two taxes, the wage rate and the capital gains rate, but how many other taxes are there now which we did not have back then? There are hundreds of smaller other taxes now of phones, internet, etc and this list could go on forever. There is a great deal of direct inflation cause by being taxed right and left.
And speaking of that capital gains tax, which we showed you before that actually takes in more money as the rate is lowered; China has zero capital gains tax because they see it as a disincentive to engage in economic activity. China has been enjoying 9% plus GDP growth for some time now and they buy much of our debt.
Corporate tax receipts as a percentage of GDP are at historic lows
But here is the rub, the largest corporations get big giveaways in the tax code which allows Google to pay 2.4% of 3.1 billion in income and GE to pay 0% on 14.2 billion. This is why these corporations, and most of Wall Street supports Democrats because they have been stopping all attempts at tax code reform. Top 20 Industry Money Recipients This Election Cycle – Who is in the back pocket of Wall Street? – Reminder: Big Business Loves Big Government (especially Democrats)
Also keep in mind that Canada and Japan have recently lowered their corporate tax rates to attract business back home. When Ireland lowered its corporate tax rates they attracted a lot of companies to set up shop there and their revenue went way up. Higher taxes on businesses cause businesses to either go out of business or flee the country. When companies decide to stop being American companies the tax from them vanishes. The more you tax corporations, the more will leave, the less money you will get and the more unemployed you will have. Never forget that when corporations have to pay high taxes, they simply raise the price of their product to cover it so it is YOU that pays. A high corporate tax simply inflates prices and makes the corporation the tax collector for the state.
But just for good measure:
One place it (the “unexpected” revenue) has come from are corporations, whose tax collections have climbed by 76% over the past two years thanks to greater profitability. Personal income tax payments are up by 30.3% since 2004 too, despite the fact that the highest tax rate is down to 35% from 39.6%. The IRS tax-return data just released last month indicates that a near-record 37% of those income tax payments are received from the top 1% of earners — “the rich,” who are derided regularly in Washington for not paying their “fair share.” (WSJ Oct. 6 2006) – The rich paid more in real dollars after the tax cuts.
Stay tuned for more talking point debunking.