On Friday, August 5,
2011, one of the most prestigious credit rating agencies: Standard & Poor’s
downgraded the status of the USA from the “AAA”, to “AA+”.
It happened after (lasting
several months) bickering about rising of the US debt ceiling. What is guaranteed by the 14th
amendment to the US Constitution (honoring of the public debt, which has
already incurred), and what has been done by every US President (disregarding
their party affiliations) suddenly became a problem to the Tea Party controlled
Congress, and in fact, became a threat to the American status in the World, and
the World’s Economy at large, in consequence.
One cannot overstate the
importance of what has happened, even though by itself it may be belittled and
overlooked by many. However, the
fact of downgrading of the USA by S&P is just a resultant of the few
decades of the US government bad economical decisions. I would go as far as calling it a
SYSTEMIC ERROR. American form of
the aggressive capitalism has slipped out of control. It has created the mess we are in now.
It’s time to connect the
dots and try to understand what has led a great country like the USA to the
state of disarray we experience right now. Let’s step slowly backwards looking at the milestones of the
demise…
1.
Let’s
look at the misunderstood and misleading at the same time, downgrade of the US
status from AAA to AA+. Reducing
of the rating is just a simple indication, that the creditors’ confidence in
the US ability to pay timely the principal debt, and the financing charges is somewhat
compromised. The US downgrade was followed
today (Monday, 08.08) by farther downgrade of the Fannie Mae and Freddie Mac,
also to AA+ status.
It is not surprising that
when the US debt is approaching 100% of the GDP, our stellar credit rating
couldn’t survive. However, what is
really surprising (and not only to me) is, that sliding in the debt with an
ever increasing speed, and having barely survived the recession of 2008 – in
which we were pushed in part by uncontrolled behavior of the aforementioned
Fannie Mae and Freddie Mac, and the “sub-prime mortgage crisis” – didn’t rise
the credit rating agencies alarms flags.
It seems like America’s policy makers, along with the administrators of
the credit rating agencies, lived in the “all American Happy Bubble” or other
sort of “parallel reality”.
America of 2008 wasn’t the same country, which as ELDORADO, appeared in
the dreams of all “would be” immigrants around the world.
Where were these credit
rating agencies when “all hell broke loose” and the country dived, head first,
in the strongest recession in our lifetimes? (Hopefully we won’t need to downgrade it to the status of
the “second strongest” recession, when the one in the making right now “exceeds
all expectations”).
2. As
I mentioned at the beginning, the obligation to honor all, already committed to
debts is a Constitutional requirement.
America has never defaulted on its obligations, even though the congress
had to vote on raising of the debt ceiling every time it happened. It worked without a ”hiccup” no matter
who was at the White House, or who controlled House or Senate. President Reagan raised the debt
ceiling 18 times (*2), George W Bush did it 5 times (around $4 Trillion) (*3). And suddenly, when President Obama
needed to raise the debt ceiling to cover already approved by the Congress
expenses… the Tea Party Republicans threatened to force the country into the
DEFAULT instead.
The Fiscal Responsibility – the slogan by which the Tea Party members
allegedly “live and act” – by itself, is a very noble idea. It’s actually the only right idea,
which should govern the actions of the Washington politicians on both sides of
the isle.
All countries in the
World have some debt. Credit is
one of the fundamentals of the ‘free market economies’. However in general a certain level of
the debt becomes the unsustainable debt.
The economists do not agree on any arbitrary numbers, but definitely the
public debt approaching the amount of the GDP in the case of most of the
countries is UNSUSTAINABLE.
In January 2001, at the
end of the second term of the President Clinton (D) the US National Debt was
$5.7 Trillion (*1) – what corresponded with 55.3% of our GDP ($10.3 Trillion).
Right after that the
“911” reset our dreams, and reset the economy – the instability era commenced –
enhanced by two wars - unwanted, and leading to nothing (except exhausting our
Treasury.
In January 2009, at the
end of the second term of the President Bush (R) the US National Debt was $10.6
Trillion (*1) – what corresponded with 75.2% of our GDP ($14.1 Trillion).
President “Bush the
Second”, without hesitation placed us on a slippery slope of spending beyond our
means.
President Obama has been
dealt the very unattractive hand of cards. Fully blown recession… plummeting markets… “sub-prime
mortgage” toxic assets leading to the collapse of the banking system… fall of
the automotive industry… It was
the end of the World we all knew.
We were sailing in the uncharted territories.
According to the
principles of the Keynesian economy the only thing, which might have had any
positive effect on the ailing (read: dying) US economy was “the transfusion” of
money pumped directly in it.
The plan bailing out the
banking system (and the automotive industry) suggested by the previous
president economical team, was implemented by Obama. It was supposed to work… but did it work?
No one can actually tell
if without it we wouldn’t slip in even deeper recession than the one we
experienced. No one can tell, and
yet the Republicans haven’t lost a single moment without bickering about it and
accusing Obama of socialist tendencies (since the “people” had a stake in the
“helped” industries – at least until the loans were paid off).
At the same time the
Republican Party (who for decades already was leaning toward the protection of
the wealthiest layers of the American Society) forced the President to extend
the, so-called, Bush Tax Cuts for the next few years, depriving the economy of additional
$800 Billion (the bush Tax Cuts cost the economy roughly of $2.5 Trillion –
through 2010) (*4).
As a result of the slow
recovery, and the partisan tag-of-war, the country ended up where it is right
now – with $14.3 Trillion of the outstanding Public Debt (Republicans do not
compromise on the tax cuts, but have a great appetite to reduce or totally
cancel the entitlements like Social Security, MedicAid, and MediCare, which, although
expensive, provide a safety net for those who are not in the 1% rich margin of
the society).
In 2010 the people spoke…
America voted for a change… any change.
The voters brought to the Congress young and aggressive Tea Party
members who have only one goal:
lowering taxes, lowering spending – by any means, sacrificing anything
and anybody in the process. These
young Republicans do not care if they would be reelected. They are on a mission – reduce the
government spending and force the new law preventing the government from doing
what the government is elected for – taking care of the country’s citizens,
including those who are the most vulnerable: poor, elderly, students…
Recently Senator McCain
felt offended after Senator Kerry blamed the Tea Party for the S&P’s
downgrade saying: "Lately the Democrats have been calling us terrorists,
so we need to lower that level of rhetoric." (*5)
Well, the whole country
was held hostage by a group of unscrupulous Tea Party, inflexible members – it
wasn’t a ‘fiscal responsibility’, but extortion.
3. When
I was growing up I learned about the “American Dream”, about the “land of
prosperity”, about the “land of endless opportunities”… It was a place, where in the sixties,
Herb & Dorothy Vogel (a librarian and a postal worker), could live on one,
modest salary in New York City, spending the other on purchases of the modern
art from the emerging artists (about 4000 works over 45 years).
Unemployment was low,
almost not present in “all white” neighborhoods… it was a time when the “economical” cars had “only” 302
cubic inches engines, to save on gas… Yes it was a fuel crisis, but otherwise
all the principles of the American dream were accessible, and unshaken.
In 1969, the top tax
bracket was 77% of the income with 14% in the lowest bracket. And America didn’t have a revenue
crisis.
And then in 1981 came the
Republican President Ronald Reagan and in 8 years of his presidency reduced the
top tax bracket to 38% with 11% of the lowest bracket. It is the time, when the America
started having the fiscal downturn.
The previous president, President Carter passed America to Reagan with
only 35% of GDP debt. It is rather
symptomatic that the most praised by Republicans President (who’s famous one
liner has been repeated since, zillion of times by the young Republicans – “The
Government is the problem”) is responsible for the beginning of the demise of
fiscal statue of the country.
I was observing the
months of “debt ceiling scandal” with total disbelief… I would like to have a trust in the
elected public servants. However,
they have proved that it is completely impossible. I still hope that it may change, that the American Voter is
smart enough to see who is on the side of the 300 Millions of the US Citizens and
wants to preserve the benefits for those who worked their whole lives, and need
them at their Golden Age.
________________________
Everybody understands (or
they should), that there are no issues sacred enough not to be touched. The country needs ravenous, not only
cuts, so the TAX REFORM has to happen, and has to happen soon. The Richest and the most privileged
have to start, again, paying their honest share. As far as I know – many members of this group do not mind
repaying the society for their fortune.
It’s just a good karma…
We have to get rid of the
subsidies to the oil industry, finally, when the barrel of crude is between
$80-110.
Both MedicAid and
MadiCare have to be reformed, because the bureaucracy inherited from the period
when these programs were incepted, kills the effectiveness of these
programs.
We have in America the
most expensive, and yet, not working properly health care industry. This requires an overhaul.
The credit rating of the
country has been downgrading to AA+.
The biggest US creditor, China, impatiently reminded the US of its
obligations. Are the finance
charges going to be raised – probably not. So hopefully, with a slap on the wrist, we can start putting
our fiscal house in order.
It’s not going to be
easy, since the question remains: Are we going to experience the double dip
recession? After the American Debt
Ceiling crisis, and the European Euro-Zone near collapse – the World’s economy
may be in such a vulnerable shape that the current CORRECTION of the major
market indices may be a beginning of the long lasting DEPRESSION. Corrections happen, sometimes deep, and
painful, but they are needed to deflate overbought industrial sectors. Especially in the times as uncertain as
nowadays the “market bubbles” are dangerous and have to be periodically
removed.
The market sold off
across the board. All markets in
the World lost a lot of their value.
However, the US Treasury Bonds seem to be an attractive article,
suggesting that the S&P downgrade has been already calculated in the
market, and right now the whole World’s economy is the main concern of the
traders.
Unfortunately, the Stock
Market in general, as regulated as it is nowadays, driven by the resultant of
the individual idiosyncrasies of the traders, is a very negative force in any
economically unstable situation.
In such times an old rule: “Anyone’s loss is Someone’s gain”, doesn’t
really apply. Overacting market
can and often does deepen the economical crisis.
For some reason, a common
knowledge of this fact doesn’t prevent that from happening.
One may just hope…
____________________________________________________
