Photo: Wikimedia Commons
While it’s true that the US has enjoyed a credit rating of AAA since 1917, last night’s downgrade was the second time this year that the rating was lowered – but more on that later. The big news started last night, and that news is now wall to wall.Hear that sound? Those are chips falling.
The S&P decision is written with surprising clear and simple language. Some of the key points from their overview:
“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 stabilise 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 uspessimistic 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 anytime soon.”
Grim. But you can’t say we weren’t warned. Let’ see what they said in their April analysis:
In that report S&P let it be known that the US was at risk of a credit downgrade and revised their outlook to negative. That report is longer and more detailed than the statement issued last night, and they went to extraordinary lengths to provide a road map to help avoid last night’s debacle.
They mentioned that “The U.S. is among the most flexible high-income nations, with both adaptable labour markets and a long track record of openness to capital flows” and that “the U.S.’s private sector is exceptionally innovative and competitive.”
They also took note of the the Ryan budget plan which called for a $4.6 trillion reduction in the federal deficit over 10 years and which had just passed the House April 5th, and mentioned Obama’s whimsical allusion to $4 trillion in deficit reduction which he floated in an April 13th speech.
That “budget framework” was not an actual proposal but was the subject of a June 23rd House Budget Committee hearing. Douglas Elmendorf, the director of the Congressional Budget Office said at that time, “We don’t estimate speeches,” said Elmendorf. “We need much more specificity than was provided in that speech for us to do our analysis.”
Sounds like the warm Jello that Speaker Boehner
referred to last month.
The S&P was much less optimistic when they reported that “we believe the Democratic Party, which controls the Senate, remains committed to its spending priorities and is unlikely to agree to further tax cuts, particularly for the highest-income earners, meaning Democrats are unlikely to accept the Ryan proposal without substantial modification.”
It is also worth noting that they rebuked the US for its response to the fiscal crisis of the last few years, pointing out that the UK suffered a recession almost twice as bad as what the US had been through but saw a much stronger recovery, that France had implemented an austerity program to reduce their deficit, and that Germany, which suffered a recession on par with the UK passed a constitutional amendment in 2009 which “requires the German states to have balanced budgets…”
The words you’re looking for are “Kappe Geschnitten und Balance”: German for “Cap, Cut and Balance”.
It seems that in April, S&P did everything they could to encourage the President to take the lead and accomplish the $4 trillion in deficit reduction that they saw as necessary to avoid a downgrade. A thorough read of the April analysis makes it clear that they never worried that the US would default, and so the administration’s public angst over that issue was just a smokescreen.
Obama never rose to the challenge of leadership. He couldn’t be pinned to real cuts, and instead wanted a “grand bargain”: vague, amorphous reductions that would kick in (if ever) long after he’d left the scene. Only the revenue enhancements, the tax increases would be real. He didn’t fool the Republican House, and if the had fallen for that kind of structure, such a gimmicky bargain wouldn’t have fooled the S&P.
But whats this talk about the second downgrade? It’s true.
S&P is not the only game in town. In fact, although there are 10 top credit rating agencies recognised by the Feds, and S&P, Moody’s and Fitch are unquestionably the big three, among the lesser known outfits is the fiercely independent NRSRO (Nationally recognised Statistical Rating organisation) Egan-Jones. Unlike their competition at the Big Three, Egan Jones is not paid by the bond issuers, but rather by the bond investors, the only agency that does not have that inherent conflict of interest. Their record on the purveyors of the toxic assets that led up to the financial crisis of 2008was far better than their competetors.
Egan-Jones downgraded the US the weekend of July 18th. Their report is quite detailed, and ends on this note.
“Egan-Jones does not view a country’s ability to print its own currency as a guarantee against default. Additionally, Egan-Jones generally views cases of excessive currency devaluation as a de facto default.”
We don’t know how to say it in German, but in English it’s called “Quantitative Easing”.
The sound of those chips falling will only get louder.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.