Egan-Jones downgrades U.S. debt
By Norman Leahy | Monday, July 18th, 2011 | PolicyA less well-known ratings agency, Egan-Jones, has downgraded the federal government’s debt from AAA to AA+. The report explaining why can be found here. If you’re not a client, Zero Hedge has the press release, complete with charts, which gives you a solid understanding of the report’s contents:
We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100% compared to Canada’s 35%. Nonetheless, since the US’s debt is denominated in dollars, a hard default is unlikely.
So the mummery behind the debt ceiling talks has little to do with the government’s fundamentals, which are only getting worse. This additional item is worth remembering as doomsday (or at least doomsday as it is preached in the press) approaches:
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.
Based upon that last bit, one could argue that the Federal Reserve’s mass printing of money over the last several years has effectively rendered the United States a larger version of Zimbabwe.
(Cross-posted at Score Radio Network)
Tags:
Contribute for Conservatism!
Share this post
About the author
Norm Leahy has written about Virginia and national politics online since 2002, beginning with One Man's Trash (OMT), and continuing through Bacon's Rebellion (both the blog and the e-zine), Sic Semper Tyrannis, NBC12's Decision Virginia, Richmond.com and Tertium Quids. He is the chief blogger at "The Score" and a producer of "The Score" radio show as well as being a Washington Examiner contributor.
We're 75% there! Thank you to everyone who has so far contributed! Just $2000 to go!
Comments
24 Responses to "Egan-Jones downgrades U.S. debt"
And we should not include the thinking of the poor, who also have a vote, into what America does?
LD,
Not sure I understand what you are driving at since as you say the poor have a vote. Doesn’t do them much good in Zimbabwe or even Greece, Spain and Portugal. The rich will always make out better than the poor. How do you propose to stop that? Money can buy many things wink wink.
Egan Jones is just stating the obvious. When you total all the US debts current and implied/mandated by existing legislation they can’t be paid without default on at least part of them. There are many ways to default: inflation, legislation, bankruptcy, changing due dates, etc etc. It’s happening in the Blue states and will happen at the Federal level one way or another.
Now the onus shifts again to the failure of Boehner/Cantor to match the President’s proposal for four trillion dollars in debt reduction over the next decade. Apparently, Boehner/Cantor don’t want to talk about it becasue in the view of the far right, it would be a victory for the President and if enacted would doom their electoral chances in 2012. So instead, their caucus appears willing to default on our obligations, plunging our economy back into recession, devaluing all our corporate and individual assets, and putting the international financial system into turmoil, all becasue the Party of Grover Norquist believes they are entitled to govern next time. Impeach the bunch; they believe more in Norquist’s no tax pledge than they do in their oath of office.
Thank you Bearingdrift for putting this up so quickly.
It’s important to note that Egan Jones is an investor-paid ratings service, in marked contrast to Moody’s, S&P, et al. Egan Jones’ investor clients pay for Egan Jones’ independent opinion of securities they are considering buying. The other agencies are paid by the sellers of the securities, which many (myself included) consider a direct conflict of interest, and one that contributed mightily to the crisis.
It is equally important that, as the OP notes, the downgrade has nothing to do with the debt ceiling impasse, but rather is attributable to the size of the debt itself.
Mike will soon be here to tell us how more borrowing is the answer to a debt problem. Or not.
Of course, the co-founder of PIMCO was interviewed on the radio this afternoon, and he said that failure to raise the debt ceiling would be catastrophic. So in the view of every major financial institution, every economist, most Governors, most business executives, the view is clear; the effects of default are so serious that no Legislator in his/her right mind would ever consider it. Of course, on the other hand we have the political opinion of real experts like Michele Bachmann that default is just another option. Has the republican party gone absolutely nuts? Has Norquist banished reality and consequence from consideration within his Party? Are there any republicans on this forum who will stand up and say no, I do not believe this baloney? Cantor/Rigell/Bachman et al do not speak for me?
You can tell just how well the TEA party is doing in the debt debate by how wild it is driving most of the press. It is similar to Bachmann’s announcement she was going to run and her subsequent rise in the polls, immediately the media when freaking nuts trying to get something on her so that they could defame her and put her in her place. That’s how it is now, the “news” is going absolutely wild trying to explain how bad the polls are for Republicans, how catastrophic it will be if the government defaults on its debt, and how crazy Progressives have become in the past week or so, all indications that the TEA party is striking at the soft underbelly of the beast and has an effective strategy for getting their way. It is reminiscent of the hysteria the media went through when masses of people originally painted their signs and marched on Washington D.C. to demand austerity, the way the media went over the top trying to discredit them. Smoke and mirrors.
Well Temporary, you can set up a straw man and then knock it down, but the result will be the same; that is, most of the predictions about the effects of default are coming from the formerly silent moderates in the Party who are apalled at what has now become the Party of Norquist. Frankly, who wants their personal interest rates to rise, their financial assets to plunge in value, for loans to be harder to get, for unemployment to rise again and state and local governments to cut hundreds of thousands of additional employees, thereby causing more disruption and a longer period of recovery on Main Streets throughout the nation, all over a self inflicted wound designed to help Norquist’s allies elect a republican President in 2012?
Mike is again blaming the “vast Right Wing conspiracy” that Grover Norquist and Eric Cantor control. Obama’s “strategy” now seems to be vetoing any spending cuts and to force Republicans by attrition to pass at the last minute the McConnell “plan” so he has the “absolute power to raise the debt limit, taxes and spending, absolutely.” McConnell, Reid and the rest of them will be taking credit for the legislative fragmentation hand grenade they are giving Obama and the photo-op will be of them with big grins as they all lock arms, place their greedy little fingers through the pull-ring, and then pull the pin. Cantor and The Tea Party will then have to come in to sweep up the mess.
Mike I appreciate your enthusiasm, but just watch what the final result is, not all of the posturing. The TEA party has the wind at its back, and there will be substantial cuts, just wait and see. There will be a lot more noise, scare tactics, and wild claims before it is over, of course.
Well yes Tim J, there is a right wing conspiracy enforced by Norquist, that will put a target on the back of and punish any republican who even considers closing tax loop holes in the code that benefit the wealthy. But even these guys have deserted the Party when they realized these nuts are going to put us back into recession. I mean, yes, let’s keep our tax breaks, but after all, what we really want is recovery. So in the last week, the chorus is singing a new tune, and it is a virtually unanimous condemnation of Norquist and his minions. You can claim the President has not offered cuts in expenditures, but his acceptance of $4 trillion in debt relief, and Boehner/Cantor’s rejection of his plan, undermines your argument. Frankly, when the position of your guys subjects this great nation to advice from the Chinese on fiscal responsibility, real americans have got to know Norquist has to be stopped.
Mike, do you read “New Yorker”? Ray Dalio was interviewed. Google the article, it is available online but I can’t post links. Google “Ray Dalio New Yorker Mastering the Machine.” The money quote from the article:
“Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. ‘People concentrate on the particular thing of the moment, and they forget the larger underlying forces,’ he said. ‘That’s what got us into the debt crisis. It’s just today, today.’
Dalio’s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. ‘I think late 2012 or early 2013 is going to be another very difficult period,’ he said.”
Mike, are you just concentrating on the particular thing of the moment? Methinks so.
If they are cutting like the Tea Party wants, why is the ceiling being raised by $2.5 trillion?
First, if Congress cut like the tea party wants, immediate global depression would occur. Be careful what you wish for. As to my focus, no, frankly, I have a ten year view, the same put forth by the Commissions that have reviewed our situation and made bi-partisan recommendations. Basically, we can cut the rate of growth, increase revenue by reforms in the tax code and targeted investments that will increase GDP, and by the end of 2022, we should have a balance of revenue/expenditures of about 20% of GDP and a level of debt that is very manageable. That is, and has been my recommendation on this forum for months.
“Immediate Global Depression” sounds like Al Gore talk. Mike, Obama has mentioned a $4T number, not a plan. He also mentioned that cuts to Medicare/Medicaid and SS were on the table and there was nothing short of a rebellion from the extreme left wing to the center of his base. For 2012 he can’t and won’t be specific about anything to “cut” and all he will do is threaten to veto anything serious from the other side in hopes that it translates into votes.
Right now all he is doing is occupying the office and eating junk food, playing with his toy soldiers on 3 different maps stretched out on the Oval Office coffee table, teasing our allies to see how mad he can make them and planning for another fund raiser, golf game and vacation.
Oh, by the way while we were talking about “Global Nuclear Depression”, 39 more Obamacare waivers were passed out last Friday which means that the total is now up to 1,471. This is equivalent to about 3.2 million people being waivered out of Obamacare so far, which slams back into this discussion as more debt and spending. Mike, you haven’t made the waiver list yet, but your application is still being processed.
There is no such thing as a government “targeted investment.” Mike wants to borrow more money and have the government “invest” it. Mike believes that government can invest money more productively than private industry, and that the crowding-out effects caused by massive government borrowing are negligible. Mike doesn’t understand why the marginal productivity of debt has gone negative, and he doesn’t understand what that means. It means more borrowing makes it worse, not better. And it is that way because we are borrowing to consume, not to produce. If we borrowed to build factories or mines, the borrowing could lead to wealth-producing economic activity and the productivity of debt could be positive. Maybe Mike wants to government to get into the mining business. Government ownership of the means of production = targeted investment?
Mike says these “targeted investments” will boost GDP. Well, of course they will, for just as long as they continue. Right now the fed government is deficit-spending 10% of GDP; the effect of that will stop as soon as the spending stops, the one thing Mike is correct about.
Mike, like the republicans, uses unrealistically happy growth numbers to chart a path to solvency. If only the world will continue to allow us to annually deficit-spend 10% of GDP, $1.4 Trillion, until 2022. Mike is smarter than Ray Dalio, or maybe he just didn’t read the New Yorker article. I’ll never know, because Mike is unable to argue facts and so has stopped replying to anything I post.
The phases of loss: Mike is in phase 3, Bargaining, as, sadly, are many of my friends: “What if we do this? What if we do that? What if we tinker just a bit more and use positive and smart-sounding terms like ‘targeted investment’ to fool ourselves into believing it? Can we feel wealthy and be happy for just a bit longer?”
Depression is next, and we will have a real depression to go along with it. Real estate is going to get crushed. The stock market is going to get crushed. Anyone on any kind of “theft from producers” transfer payment support is going to have trouble getting enough to eat. I’m not happy about that, but happy talk and unrealistic assumptions won’t fix it.
Sell all, and purchase liberty.
Actually Jamie, I am guided by the bi-partisan commission established to make recommendations on reducing the deficit and the debt. I claim no originality. I have simply read the reports of accomplished people on both sides of the political spectrum, and those in the middle as well, who know we can balance the three imperatives; that is, reduce the rate of expenditure growth, increase tax revenue, and do both without reducing the growth in GDP. Yes, it is a balancing act, and a meat cleaver or an ax is not an appropriate tool for this task. Intellect, experience, and judgement are required; leave your extremist ideology at the door. And frankly, the action the House is expected to take tomorrow may feed more red meat to their base, but that base is shrinking daily as more and more americans have been educated about the catastrophe that would confront all of us if their agenda of immediate extreme enforce austerity were to be put into effect. Since McConnell can’t bring them to their senses, it is ironic that the President probably will save them from their own self destruction by making a deal we can live with.
LD,
I don’t get your point about the poor, too. I’m one of those poor, and know the impact if the U.S. dollar becomes worthless.
Some give us the usual ideological points, but let’s face it: with the size of the Federal deficit, everything needs to be on the table. That means spending cuts, ending tax breaks, etc.
It would only take one thing (which will never happen) to get all of the spending cuts through, and that is for every man, woman, and child to be sent two bills to pay. One bill would be for each person’s share of the national debt to date, which is approximately $100,000, and the second bill for the amount that each person owes for this year’s deficit, approximately $6,500. If people could see in front of their very eyes what the reality of the situation is you can bet government spending would be cut in no time at all, it is only because politicians can keep financing the debt that they can keep growing it. I suppose it is too much to expect a population that has so much credit card and mortgage debt to do anything but elect politicians who have the same world view. The nations finances are nothing more than a macro version of the average U.S. citizen’s finances, and all the voting public seems to want to do is to keep expanding the credit limit and making the minimum payments every month.
“the President probably will save them from their own self destruction by making a deal we can live with.” And what deal will the Savior share with mere mortals that can pass both houses of Congress and will avert your ever evolving prophecies of Global Financial Destruction i.e. Armageddon?
The Bipartisan Commission was a phony. They used phony numbers and came up with phony results. Garbage in, garbage out.
All Mike can bring himself to say he wants to do is “reduce the rate of expenditure growth.” He can’t even admit we’re spending too much. Wharton School, Mike? That’s where they teach Keynesian garbage like that.
It’s not about red meat, it’s about facts. So let’s discuss some facts.
Most importantly, we’re not even discussing the real federal deficit. Growth in entitlement “obligations,” which progressives like to conflate and even equate with Treasury coupon payments, are growing at phenomenal and unsustainable rates. A google of “what’s the real federal deficit” produced an article in USA Today from 4 August 2006 which talks about the various sets of books the government keeps:
“The set the government promotes to the public has a healthier bottom line: a $318 billion deficit in 2005.
The set the government doesn’t talk about is the audited financial statement produced by the government’s accountants following standard accounting rules. It reports a more ominous financial picture: a $760 billion deficit for 2005. If Social Security and Medicare were included, as the board that sets accounting rules is considering, the federal deficit would have been $3.5 trillion.”
Some of us in the Austrian School have known for decades, and did our best “voices in the wilderness,” that we would eventually get to where we are now. But, as long as the system seemed to be working, everyone ignored us. Now that the day of reckoning has arrived, don’t expect us to shut up.
Using GAAP accounting, the federal deficit is approximately $5 Trillion per year. John Williams at Shadowstats regularly analyses and publishes budgetary information for fed dot gov. For 2008, the figure was $5.1 Trillion. For 2009, it was $4.3 Trillion. For 2010, another $5 Trillion. These liabilities continue to accumulate and must be dealt with. Obviously, there can’t be enough “revenue” to pay for this. With federal revenues of about $2.2 Trillion and real annual deficits of $5 Trillion, in order to pay-as-we-go for real, the federal government would need to take in over $7 Trillion annually. This would certainly crush our $14 Trillion economy. Williams isn’t the only one documenting this real deficit. Former CBO head Walker is speaking to anyone who will listen. His message isn’t popular; people like happy talk, not facts.
And all Mike can manage to advocate is a slowdown in spending increases, while ignoring the actual accumulation of benefit liabilities. These liabilities cannot, will not be met. There’s no way. We try to fool ourselves with Enron-style off-balance-sheet accounting tricks. But economies run on facts and math, and ultimately the facts catch up.
Jamie Jacoby that was a great post.
Thank you Mike for causing Jamie to make such an interesting post //grin//.
Henry Ryto and Valentinus,
My point about the poor is that the middle class is shrinking. This shrinkage is more due to them heading lower then those headed upwards. Republicans hate class warfare, but as more people become poor, guess which party they are going to vote for?
Henry,
As for the decreased value of the dollar, there are some advantages with this. As the dollar goes down in value, our exports become more competitive. We already have the problem with China keeping the yuan artificially low even though it should be rising due to the trade deficit. When nations like Japan see the value of their currency rising, their national banks start buying up dollars to decrease the supply. There are a whole host of artificial influences that are responsible for the trade deficit.
The reality as I see it is that the value of the dollar should be going down as long as the trade deficit continues. Once the value drops low enough, domestically produced products will rise in competitive value enough that imports will decline and exports rise. I understand this is a rather simplistic explanation, however the simple portions of the equation still remain valid.
Well Temporary, Jamie saying something does not make it so. And since entitlement reform was put on the table by the President, Jamie did not even get the President’s proposal correct. Fact is, the Commission is the best road map we have; certainly better that the obvious political ideology of Grover Norquist which requires legislators to obey him over their oath of office. Fact is, with reductions in expenditure growth, with closing loop holes that allow the rich to get off scott free, the economy can be managed to produce an increase in the GDP, which will itself produce jobs, profit, and added revenue to the Government to pay down debt. Jamie saying that is not so means nothing to me. I prefer to listen to the best and the brightest who have said it can be done.
Leave your response