Finally, at least one of the bond rating agencies in the United States has owned up to its hypocrisies -- and slapped down the country's long standing credit rating, from AAA to AA+. The press release indicates that the agency, Standard and Poors, apparently reconfirmed its decision even after running the numbers a second time at Obama's insistence, this time using the purported $2 trillion in budget cuts that are supposed to be negotiated by a special blue ribbon committee to be struck by both houses of Congress any day now. And S&P has also given a "negative outlook" warning meaning it reserves the right to downgrade the rating again any time within the next 24 months.
In the short term it may not mean that much -- perhaps a quarter to half a percent hike in the overnight rate banks charge each other, to about 0.50%. But as S&P points out, it's not just the fact the US debt to GDP ratio has now hit 100% (the agency says 74% but it pushes up to a hundred when you consider long term obligations for social services), which means the economy will have to grow at at least that rate for the foreseeable future until it gets its books balanced again. It's also the fact the current budget process and the game of chicken that both parties but especially the self-identified "Tea Party" but more properly called Tea Bagger faction of the GOP was so irresponsible that it pushed to the indefinite future not just cuts to non-discretionary programs such as Medicare, Medicaid and Social Security (which will eventually have to be done) but also the much harder decisions on raising new revenues (i.e. tax hikes).
While the agency says it takes "no position" on the proper revenue and spending mix, it does nevertheless frown on what the process has degenerated to. And it also points out that compared to similar fully developed countries, Canada is at about 35% of debt-to-GDP and even France has managed to contain its ratio to about 83% with a long term plan to bring it down. With that kind of math, it's no wonder the US was due to lose its rating.
I think we're going to see a significant correction in the markets in the week forthcoming. I also think that both parties do have themselves to blame. It's not just the ticking time bomb of entitlements which need not have been if some had been willing to touch the third rail and tinkered just enough to ensure stability of payments as well as growth in the trust funds (incredibly, the US is the only country that still forbids the trusts from investing in the markets -- unlike Canada where we have the Caisse de Dépôt and the CPP Investment Board. I'm not talking privatization, I'm talking about getting the best of the best from the investment community to ensure long term growth.
The other big problem is that the US is the only country that spends more on military procurement and salaries than it does on its own people, both military and civilian. Other countries (and democracies no less!) have strong militarism but also a strong sense of social solidarity, that it's "all of us or none of us." This has never existed in the US and has always been dismissed as "socialism."
While the present budget deal contains a poison pill of sorts, that fifty percent of future cuts will have to come from the Pentagon if no new appropriations settlement is reached by February 2012, it still lets both the Tea Baggers as well as the labourites get away with murder and the same games that have existed since the present shape of government was set up by the Hoover Commission (as in Herbert Hoover) in 1947. Not to mention the ever encroaching growth of the military industrial complex that Eisenhower warned of fifty years ago and will continue to exist if the TBs don't realize that it's hypocritical to demand cuts to funding for the arts and public broadcasting but not to the bases or armouries in their home districts.
The markets have made their decision. The elected officials had better get their act together and super fast if we're going to avoid a double dip recession that was entirely their own making. And it also makes the case for new trade and monetary arrangements that don't involve the intrusion of the United States.
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