Moody’s to USA: Change Course on Deficit Spending By Mid-July or Else…
Posted by iusbvision on June 2, 2011
By IUSB Vision Editor Chuck Norton
What does “or else” mean? It means that Moody’s strips the United States of it’s AAA credit rating. What does that mean? I have no time to explain now as I am about to leave for dinner, but essentially it means that the Great Depression will look like a stroll in the daisy’s.
I have been in the process of putting together an economic roundup post of a new dip in the recession. A double dip recession is exactly what we predicted in early 2009. The papers said that this dip was unexpected, but even someone with basic economics training and a little talent could see it coming and we did [When I took the economics aptitude test that the IU Business and Economics School gives all B&E students I received one of the highest scores in IU history. We are not trying to be cocky, but like I said, a little talent - Chuck].
Now the game is over. The Democrats spending binge must end or else.
I would like to deal with the first objection that the left is going to make, “What do you mean ‘The Democrats spending binge’! Isn’t this all Bush’s fault because of the tax cuts?”
This graph answers that question. Remember the first tax cut was passed in 2001, it was the “Bush Bucks” refund checks. It did not help much. The real tax cut in 2003 is the one that set long term rates and tax rules to help economic certainty is the one that made the difference.
2003 is the year that the Iraq war started as well. It took about a year for the tax cuts and rules to settle into the economy, but you can see the results. In spite of increased spending the deficit was dropping in fact the “rich” paid more taxes in real dollars (that is in dollars and inflation adjusted dollars) after the tax cuts were passed. For more information on this graph check HERE and be sure to read the commentary at the bottom of the page.
The simple truth is this, when the productive are taxed at a higher rate they just park their money so it is not taxed at all. The same thing happens when there is economic uncertainty. The result is that the tax burden is transferred from the rich to the middle class; exactly the opposite of the left’s stated intent.
The second objection is equally as obvious and equally as easy to defeat, “Look at what the Clinton tax increase did for the economy and the deficit.” Yes by all means lets do just that. The massive 1993 tax increase did increase revenue, but not nearly as much as the Democrats, CBO static models and such had predicted. Reports from the CBO, OMB, and IRS all agree – LINK. After the Republicans took over Congress, passed welfare reform, cut spending, set a path to a balanced budget and CUT TAXES on capital gains from 28% to 20%, instituted the child tax credit, cut taxes on inheritance and raised the ceiling for IRA’s the economy exploded and revenue pored in. Unfortunately at the end of Clinton’s term the capital gains tax cut expired because it had a sunset provision, Clinton pushed massive new fuel and energy regulations which sent fuel prices skyrocketing and the tech bubble burst causing a stock market crash.
So what will happen if we lose AAA and how will it impact you?
Coin Week explains this in technical terms:
* A credit rating reflects the risk of default. A downgrade will raise the cost of borrowing for the United States government‚ could have a spillover effect on corporate debt and investors will buy fewer U.S. Treasuries.
* There could be a massive outflow of foreign investment. Some global funds are mandated to invest only in AAA debt and if the U.S. loses its AAA rating‚ it loses those investors.
* A credit rating downgrade provides a perfect excuse for an alternative reserve currency to replace the dollar. China‚ Russia and other countries are already suggesting creating a “basket of currencies” that would replace the U.S. dollar.
* Interest rates will increase. Should the United States lose its AAA credit rating‚ it will trigger rising interest rates in an already unfrozen credit market.
* The risk of inflation increases. Philadelphia Federal Reserve President Charles Plosser has warned that the U.S. government’s emergency programs for the economy undermined central bank independence and raised the risk of inflation. “When a nation’s treasury or finance ministry and its central bank work too closely together‚ there is a clear risk that the government’s spending will end up being financed by the central bank’s power to create money‚” Plosser cautions. “History shows us that you can get very bad economic outcomes with rapidly rising inflation.”
What does this mean in English?
Many of those who invest in the United States would stop, as many funds mandate investments of AAA risk. Wealth would leak out of the country fast. It will be harder for the United States Government to burrow money. This will cause interest rates to rise.
The interest on the debt that the government would pay every year would skyrocket, leaving even less money to pay our bills with. The credit markets would dry up even worse than they are now. This will make it very expensive or impossible for seasonal businesses like farms to get seasonal loans. Many businesses use short term loans for big contracts and sales such as the purchase of a capital investment like a large production machine or a farm tractor. All of this will mean less production, job loss, and severe inflation. The government, being unable to borrow as much money and as cheaply, will do more of what it is doing now, just print up money. This makes the value of YOUR dollar even less resulting in even higher prices for everyone. At that point the government will be forced to have massive spending cuts, or print money till it is like the Yen.
Interest rates on mortgages, credit cards etc would jump considerably.
We did not lose AAA even during the Great Depression. In a country that requires as much temporary credit as our economy and production does, losing AAA will impact us in a way that is much worse than it would many smaller countries.
It gets worse as I have saved the worst for last. Many of these short term loans/credit is used for large import/export deals. The United States is the world’s largest importer and has fallen to fourth behind the EU, China, and Germany in exports. We have not even considered what impact this would have on global markets.
Welcome to hell.
We are already heading into a double dip
Companies in the U.S. added fewer workers than forecast in May, a sign that job growth is struggling to gain momentum, data from a private report based on payrolls showed today.
Employment increased by 38,000 last month, the smallest increase since September, from a revised 177,000 in April, according to figures from ADP Employer Services. The median estimate in the Bloomberg News survey called for a 175,000 advance for May.
U.S. private-sector payroll growth slowed sharply in May, falling to the lowest level in eight months and prompting some economists to lower forecasts for job growth in Friday’s U.S. government report.
The pace of growth in the U.S. manufacturing sector tumbled in May, slackening more than expected to its slowest since September 2009, according to an industry report released Wednesday.
The Institute for Supply Management (ISM) said its index of national factory activity fell to 53.5 in May from 60.4 the month before. The reading missed economists’ expectations for 57.7.
Stocks sank more than 2 percent Wednesday, following several economic reports that confirmed a struggling recovery and after Moody’s downgraded Greece’s bond ratings deeper into junk status.
The last month has been a horror show for the U.S. economy, with economic data falling off a cliff, according to Mike Riddell, a fund manager at M&G Investments in London.
“It seems that almost every bit of data about the health of the US economy has disappointed expectations recently,” said Riddell, in a note sent to CNBC on Wednesday.
“US house prices have fallen by more than 5 percent year on year, pending home sales have collapsed and existing home sales disappointed, the trend of improving jobless claims has arrested, first quarter GDP wasn’t revised upwards by the 0.4 percent forecast, durables goods orders shrank, manufacturing surveys from Philadelphia Fed, Richmond Fed and Chicago Fed were all very disappointing.”
“And that’s just in the last week and a bit,” said Riddell.
Pointing to the dramatic turnaround in the Citigroup “Economic Surprise Index” for the United States, Riddell said the tumble in a matter of months to negative from positive is almost as bad as the situation before the collapse of Lehman Brothers in 2008.
Obama’s Treasury Sec. Tim Geithner said just on April 26 that there was no risk of the United States losing the AAA credit rating. So much for that. Real pro’s like Jim Rogers said that he expects us to lose AAA. Famed University of Maryland economist Pete Morici and David Walker, the former Comptroller of the United States say we should have lost it already – LINK. Jim Leaviss, head of retail fixed interest at M&G, the fund management arm of the Prudential, says that the United States will lose AAA after 2011 – LINK.