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Kevin ClarkeJune 03, 2011

A truly scary warning from Moody’s Investor Services was issued yesterday, but if the credit rating service hoped to end the brinkmanship over the U.S. debt ceiling, it appears so far to have succeeded only in provoking deeper heel-digging in Congress. Moody's said June 2 that “if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the U.S. government's rating under review for possible downgrade, due to the very small but rising risk of a short-lived default.” Moody’s said the nation’s sterling triple-A debt rating will be maintained if the debt ceiling is raised, as Treasury Secretary Tim Geithner has implored Congress, “and default avoided.”

Commenting on the lack of progress in Congress on the debt ceiling, Moody’s dryly noted that it “fully expected political wrangling prior to an increase in the statutory debt limit,” but “the degree of entrenchment into conflicting positions has exceeded expectations.” Moody’s said, “The heightened polarization over the debt limit has increased the odds of a short-lived default. If this situation remains unchanged in coming weeks, Moody's will place the rating under review.”

After performing some remarkable fiscal sleights-of-hand (by not paying into federal pension plans, among other maneuvers) to put off the day of reckoning on the debt (now delayed until Aug. 2), Geithner has warned that even a “technical default” on U.S. debt would be catastrophic for the U.S. and perhaps the global economy. Greece crisis, forget about it. We’re talking about Atlas really shrugging here.

Moody’s, perhaps eager to make up for its part in the housing market debacle when it continued to issue smiley-face ratings on mortgage-backed securities even as the housing market blew-out in 2007, has telegraphed its intentions in the event of a default. Many in the G.O.P. had been suggesting that a government shutdown and technical default would not have significant repercussions. The service's assessment backs-up Secretary’s Geithner's Cassandra-ing (sorry, seem to be having my own Greece crisis). Any default, it warned, would mean a downgrade on U.S. debt to an Aa rating. Moody’s said it would be poised to restore the Aaa-rating in anticipation of a hastily resolved default. But if the government shuts down, as some suggest, for weeks or months, who knows where the nation and its credit rating could end up? Dublin, Athens, Madrid, Lisbon are some possible relocation sites. We live in fragile and trigger-happy economic times. The uncertainty engendered by a downgrade and the jolt to U.S. credibility and presumed solvency it represents could have a devastating impact on the ability of the United States to borrow the dough that keeps what’s left of the economy on the go.

Democrats have predictably seized on the warning to denounce the Republican intransigence on the debt ceiling, but Republicans, also predictably, found legitimacy in Moody's analysis for their position that an increase in the debt ceiling needs to be accompanied by budget cuts. Moody’s in fact assures: “If the debt limit is raised and default avoided, the Aaa rating will be maintained." It adds, however, its rating outlook will depend on the outcome of negotiations on deficit reduction. Says Moody's: "A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody's to change its outlook to negative on the Aaa rating.” In other words even if we get past the debt ceiling crisis without doing too much long-term damage, rating services are going to continue to cast a cold eye on U.S. borrowing unless a credible plan to deal with the deficit and national debt is forthcoming soon.

Note that Moody’s, like the U.S. bishops, is not trying to define the nature of that "credible" deficit reduction plan, that is, it endorses neither shock-therapy style cutbacks or glide-path deficit-spending back to something approaching solvency. But Moody’s does call for “substantial and credible long-term deficit reduction,” adding, “such reduction would imply stabilization within a few years and ultimately a decline in the government's debt ratios, including the ratio of debt to GDP.”

That appears to be the goal on both sides of the aisle. How precisely we get there will be in hot dispute, likely right up to the July deadline on a rating reassessment specified by Moody’s. Even as the unemployment numbers continue their march of gloom and the housing markets double-dips, some are still arguing for a deficit reduction plan that will look a lot like German and U.K. style austerity. For economists like Paul Krugman, however, that approach only portends a great deal more short-term pain for the jobless, poor and middle class and the possibility of catapulting the fragile two-year-old recovery into renewed recession or worse.

It appears we are playing a game of chicken not just with the debt ceiling, but with two contending theories over how best to throttle up the U.S. economy—creating jobs and restoring something that looks more like prosperity in America—without driving ourselves over the edge. Personally I would prefer not living in a time that future economists will be comparing to 1937 when F.D.R. took his foot off the floor too soon. Much is riding on the folks in Washington getting this right. It's probably unfortunate that we teeter on the edge of a renewed economic crisis just as the presidential election circus rolls into Washington. Grandstanding and playing to respective bases may hamper serious discussions aimed at unraveling the debt crisis and putting more Americans back to work. Over the past year President Obama has been balancing calls for more stimulus and arguments for austerity. He may not be able to ride these negotiations out in the middle. 

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ed gleason
12 years 10 months ago
David says 'cutting back drastically on the social-welfare programs (about 50%)':
and the military is only 17% .. He does not mention that the social-welfare programs are financed by SS and Medicare revenue stream. Military has no revenue stream. My suggestion is Obama announce withdrawal from the to wars on July 15th, announce a gradual age increase for SS and raise the contribution limit to 250K and we would have a pass instead of a GOP shut down that will make Greece look like a cakewalk. After 2012 Dem house we anounce an income tax to 40% on 250K plus and capital gains to 18%.= deficit fixed..   
 
Tom Maher
12 years 10 months ago
On Tuesday May 31, 2011 a the House of Represenetetative overwhelmingly defeat a bill to raise the federal debt ceiling by 2.6 trillion dollars to allow the federal goverenement to keep borrowing.  All the Republicans and about half the Democrats voted against the bill.  The vote was over 3 to 1, an extremely rare three quarter majority.

The idea of raising the debt limit without very substantial, trillion dollar budget cuts that changes the trajectory of ever-increasing barrowing in the futhure is not going to happen in the 112th Congress. 

The country has reached a poltical crossroads in deciding whether or not the extreme deficits being run currently will be allowed to continue.  Currently the federal goverenment is barrowing over 40 cents on every dollar of expenditure.  The House of Representatives with its Constitutional power to initiate spending proposals has squarely put the Obama admisistration on notice that the admisistration for a debt ceiling increase without substatial spending cuts is not acceptable.

These over 340 Representatives are indeed accountable to the people and they very well know they are up for reelection in 2012. So their overwhelming vote agaist an automatic, "no-strings atttached" debt ceiling increase is very deliberately taken.  Th presumtion must be that Congress is being responsive to the will of the people.

If you paid attention to the results of the 2010 election just six months ago where Republicans gained an historic 63 votes in the House exactly becasue of the strong opposition nationwide to runaway budget deficits.  For the first time in history the Congress in 2010 failed to pass a budget and may again this year fail again.  The budget is a basic means of controlling expendures.  But the U.S. Senate is politcally sharply divided and unable to pass a budget to control yearly ependitures.  The House of Representative must use the power it has to control the hugh and growing federal debt. 

Our nation is and should be in political crisis over our national debt crisis.   This basic debt crissi needs to be polictically resolved on way or another in the 2012 election.
ed gleason
12 years 10 months ago
David;   I said SS and Medicare had a revenue stream.I did not say it was adequate. It can be increased and benefits modified and  not ended as is the GOP plan with Medicare vouchers and privatizing SS. What's not to understand?
Tom... you mentioned favorably  the GOP theater vote on debt limit last Tuesday[GOP leaders wrote a law brought it to the floor and then demanded everyone vote against it]
On Tuesday DOW was 12550... by Friday DOW close  was 12150, a 400 point drop on what was a joke law. Wait till August 2nd and see DOW go back to DOW 6500..if the GOP/TP extemists have their way..  that's a 50% drop
This week 401Ks dropped more than 3% by a joke. .. no joke for the working class Heh?
Suggest everyone on CW go to cash before 8-2-11 because there will be no reasoning with ideologs.
Tom Maher
12 years 10 months ago
Ed Gleason ( #5)

The stock market did indeed go down but not from the overwhelming defeat the bill to raise the national debt ceiling by another 2.6 trillion dollars.  Rather bad economic news of every kind was reported such that all financial markets were alarmed that the economic recovery was losing momentum.  The most obvious bad economic news was May's unemploment figure went back up to 9.1 percent. Other major reversals were the decline in U.S. consumer confidence.   Hosuing prices continue to decline and so did housing construction for over three years.  Investors think the economy may be  softening again.  We do not need  or want a faltering economy.       

But for the United Staes the biggest show-stopper is the increase in national debt from increase deficit financing of the budget.  Have you followed what been happening in Europe about the national debt problems of Greece, Ireland and Portugal?  Their national debt is near to or over 100 percent of their GDP just like ours is.  Investors would no longer in their debt securiteis so they had to be bailed out by large European nations.  To be bailed out required that they implement drastic austerity measures such as 30 percent cuts across the board including salaries and pensions.  This is real liife economic fact not ideology. 

The point is the U.S. has been warned by experts that its debt to GDP is also way too high and this will cause investors at some unknown point to no longer  invest in U.S. government debt.  Likely there will not be enough money in the world for the 14 trillion going on 16 trillion needed.  Leterally there is not enough money in the world to finance the ever-increasing trillions of U.S. debt. 

Geece, Ireland and Portugal shows there is a limit to how much even a goverenment can barrow.  And they also show the impact of running out of credit is very severe.  Of course it would be worse for the U.S. since we are the worlds largest economy there would be no one or group of antions large enough bail us out.  If the U.S. doesn't know when to stop we will wind up like Argentina ten or so years ago where they defaulted on their debts and their economy was in ruins for years.  We do not want to come close to having anything like the expereinces of Greece, Ireland or Portugal happen here.  That would be an unrecoverable disaster thich we must avoid for everyones sake even the people who do not understand the real urgency of addressing our national debtr crisis is. 
Martin Gallagher
12 years 10 months ago
A quick question on Social Security contribution limits.  If we raise the contribution limit to $250K, will those people who contribute on that income draw proportionately more benefits when they retire?  Also, won't businesses have to pay higher employment taxes?
ed gleason
12 years 10 months ago
Walter; Your fear of a talent drain may be overblown in MHO. In San Francisco and Silicon Valley the talent is flowing in like water over Niagara. Also FYI, California can't raise property taxes more than 1.3% on whether multi-millionaire mansions or shacks.
It's the law.. GOP wants zero capital gains tax and zero dividends income tax.. that will not benefit the un-employed ...only those NJ millionaires you mention. 
Martin Gallagher
12 years 10 months ago
David, that's what I suspected (increasing the wage base would not increase pay out).  This seems like a tax increase directed squarely at the middle class.  In many regions of the country, $150K/year, is a middle class salary.  If you increae the wage base from $107K to $250K, the $150K wage-earners would pay an additional $4300 in taxes per year .  Moreover, they will not be contributing anything extra for their retirement because payouts (if SS still exists), won't be tied to their contributions.  To boot, employers will have to pay a higher employment tax prompting many to reduce salaries.

Raising the wage base seems like the last thing you would want to do to the middle class.

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