Posted by Steve Markowitz on April 7, 2012
Yesterday, Egan Jones, a respected credit rating agency, downgraded US credit another notch from AA+ to AA. Last July, the same firm downgraded US credit from AAA to AA+, just before Standard & Poor’s followed suit.
While the mainstream media is yet to give much press to this downgrade, it is significant. In making the downgrade, Egan Jones said: “Without some structural changes soon, restoring credit quality will become increasingly difficult.” Egan Jones referred to the United States debt to GDP ratio that now is approximately 100% and predicted to grow to over 112% by 2014. The concern is that without changing the trajectory of the debt, the bond markets will get spooked significantly increasing America’s cost of borrowing, creating a negative feedback spiral as is currently occurring in some European countries.
Some of the Left will point to the current low yields on Treasuries as an indicator that America does not have a debt problem. The theory goes that since there are buyers for US Treasuries at such low rates, that there must not be a problem. That might have some validity if it wasn’t for the fact that over 60% of the Treasuries are currently being purchased by the Federal Reserve. That certainly sounds like alchemy, if not a Ponzi scheme.
It wasn’t too long ago that countries like Greece and Portugal were able to sell sovereign bonds at very low interest rates.. However, when the markets decided that their debt was excessive, the yields skyrocketed almost overnight. The United States is not immune from this possibility.
Posted in United States Debt | Tagged: AA, AA plus, Debt, Downgrade, Egan Jones, Federal Reserve, GDP, Treasuries, US credit, yield | 2 Comments »
Posted by Steve Markowitz on May 17, 2011
In theory, the U.S. government is about to run out of money and needs to barrow more to keep running at its current spend rate. However, Washington is using finance gimmicks to keep on spending. Treasury Secretary Timothy F. Geithner announced that he is taking “special measures” to keep up the spending spree. The government is tapping federal retirees’ pension funds as a source of funding. In other words the government is barrowing from its own workers to circumvent the barrowing restrictions places on it by Congress. Yikes; Enron on steroids!
U.S. government debt will soon hit the $14.3 trillion debt ceiling, the legal limit it can currently borrow. This ceiling has been little more than a joke since Congress has raised this limit dozens of times, as the chart indicates.
The Obama Administration, Geithner and some in Congress are using scare tactics to get the debt limit raised. They claim that if Congress does not vote by August 2 to raise it, that all sorts of calamities wall occur including suspension of all government services, as well as defaulting on US debt obligations. However, these issues can be resolved up front by Congress passing legislation that prioritizes payments, first repaying US debt obligations and maintaining essential services like the military and Social Security payments. The government’s tax receipts could fund these priorities without additional barrowing.
The reason the Obama Administration and others in Washington want to raise the debt limit is to avoid making the tough decisions required to bring federal spending under control. At the current revenue and spending rates, the government is required to barrow $125 billion per month, something that is not sustainable.
If Congress is not successful limiting government barrowing (i.e. spending) at this crucial juncture, prior increasing the debt limit, we will lose the ability to control how the unwinding of the America federal debt crisis will unfold. We will then be at the mercy of the bond markets (free market) who will show no mercy for out of balance finances.
Posted in United States Debt | Tagged: $14.3 trillion, Congress, Debt, Debt Ceiling, Obama Administration, Pension, Timothy Geithner, US Treasury | Leave a Comment »
Posted by Steve Markowitz on April 9, 2011
This morning we woke up to the wonderful news that our government will not shut down. We have once again been saved by our politicians. Headlines included:
Wall Street Journal – After days of haggling and tense hours of brinksmanship, congressional leaders at the last gasp reached an agreement late Friday to avert a shutdown of the federal government.
New York Times – Deal Said to Be Reached to Avoid Government Shutdown. Lawmakers reached a last-minute budget deal Friday night, a Democratic source close to the negotiations said, averting a government shutdown shortly before a midnight deadline that would have shuttered federal facilities and forced hundreds of thousands of workers to be furloughed without pay.
CNN – House Speaker John Boehner says Democratic and Republican negotiators reached a budget deal that will avoid a government shutdown. Boehner said the House will pass a short-term measure that will keep the government funded through the middle of next week, when a longer-term package is expected to be enacted.
Common in these reports is the statement that the politician’s “avoided” a government shutdown. This is both laughable and a ruse. It is laughable because it was the incompetence of the last session of Congress that the 2011 budget was not completed before the New Year, thus causing this “Chinese fire drill”. Further, these same politicians on both sides of the isle purposely got the public’s attention on the potential government shutdown and a few billion in cuts, thus avoiding discussion on the real problem, the huge deficit that can only be tackled by cutting entitlement programs.
The chart below tells this sad story. With a 2010 deficit alone being $1.3 trillion, bragging about a $39 billion cuts in spending is a slight of hand. Imagine what this chart would look like if the $100 trillion of unfunded U.S. government liabilities were added?
Posted in Debt, Deficits, United States Debt | Tagged: Budget, Congress, Deficits, Politicians, Washington | 1 Comment »
Posted by Steve Markowitz on September 29, 2010
Last week Federal Reserve (Fed) Chairman Ben Bernanke and company made some startling comments at the Federal Open Market Committee meeting that included:
“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.
“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
While economists are trained to speak in a language that few can understand, the meaning of these statements is clear. The Fed is suggesting the likelihood of a new round of quantitative easing (“QE2”). QE is when the Fed prints money to create liquidity in the economy and use this new money to purchase US government debt. They want to increase liquidity in order to create higher levels of inflation. While a bit more inflation would be a good thing, once started it is difficult to contain and can quickly spiral out of control.
Already the world has expressed concern over the Fed’s statements by running up the value of gold and depreciating the US dollar. Should this trend accelerate, the consequences would serious and include higher costs for imported goods and increased interest rates as foreigners refuse to buy U.S. Treasury Notes without higher returns.
In addition, the first round of QE was a failure. The Fed rolled out QE1 in November 2008 and added to it in the months that followed. QE1 was supposed to help banks loan more to businesses and homes. Those goals were not achieved. But that doesn’t stop the Fed from considering QE2. Like a drunken gambler, they seem to believe that doubling up on a bad bet somehow mitigates risk.
The recession that started with the meltdown of the financial system more than two years ago was a traumatic jolt to the economy, possible without precedent. While this reality may have justified the radical steps attempted by the Fed initially, the failure of these actions demands a different approach going forward. Repeating the same failed policies will not result in a different outcome. Expecting otherwise is the simplest form of insanity.
Posted in Quantitative Easing, United States Debt | Tagged: Ben Bernanke, Debt, Economists, Fed, Federal Reserve, Gold, Inflation, QE2, U.S. Treasury Notes, US Dollar, US Governent | Leave a Comment »
Posted by Steve Markowitz on June 14, 2010
On June 8 this Blog posted an article titled “The Debt Bubble Has really Popped” that included Germany’s response Europe’s growing debt problems. Germany committed itself to serous debt reduction to avoid future economic problems like Greece currently faces.
More recently France, another major European Union (EU) “player”, announced its own steps for debt reduction that included:
- Cutting public spending by about $54 billion over three years
- Raising France’s retirement age, an aggressive move in France.
- Bring France’s governmental deficit down to the EU’s 3% limit. In other words to play by the EU rules.
- In addition, Prime Minister François Fillon indicated that France would reduce its public deficit by about $120 billion.
Just as telling as these budget actions is the rhetoric coming from France’s politicians. Prime Minister François Fillon said: “It would be cowardly of us to tell the French people that their pensions could be maintained without lengthening their working lives and without altering the symbolic retirement age of 60.” While not a pleasant statement for those who cannot retire when they thought they would, it is refreshingly honest coming from a politician. Our politicians in Washington are indeed “cowards”, spending as if there were no consequences.
In another moment of honesty, France indicated that it is projecting tax-revenue estimates based on an assumed growth rate 1.4% for this year. The Obama Administration on the other hand has projected a long-term growth rate of about 3% in coming up with the already massive projected deficits. Should actual growth rates be lower, as they likely will be, the deficits will be even larger than the $1 trillion plus estimated by the Obama Administration.
Remarkably, the Nanny States of Europe are leading the way in addressing the generational stealing that comes with unsustainable government deficits. President Obama, who has on occasion expressed admiration for European countries’ policies, would do well to follow the Germans and French on addressing the deficits. Unfortunately the programs Obama has put in place since taking office add substantially to these deficits and preclude him from making an honest assessment to the American people about the debt problem.
It is ironic that the Europeans join the Tea Party as the drivers for deficit reduction. It will take a major statement by the electorate in the upcoming November elections to begin repairing the decades of damage done to the United States by the Progressives and their massive entitlement spending.
The winds of change are indeed coming!
Posted in Debt, Deficits, Entitlements, France, United States Debt | Tagged: Bubble, Debt, Deficit, EU, Europe, François Fillon, France, Germany, nanny States, Obama, Progressives, Retirement, Tea Party | Leave a Comment »