The Meaning of the S&P Projected Downgrade

As most people who follow finance are aware, Standard & Poor's, one of the primo credit rating agencies, issued a projected negative credit rating for the U.S. on Monday. Specifically, it said there was a "one in three chance" it would lower the Treasury Department's current AAA rating (the highest, and the U.S. is one of 17 nations sporting it) on U.S. debt in the next two years.

To more fix ideas on what that means, currently the AAA rating allows the U.S. to borrow each dollar at 6.5 cents interest on the dollar. By comparison, Greece, with a BB rating, must shell out a full 20 cents for every dollar it borrows. In other words, it can make an enormous difference, especially to those who depend upon loans, which would include most college students, as well as small business owners and potential home buyers. Suffice it to say, a degradation of rating to even AA would be horrendous and millions would suffer.

How serious should this warning be taken? First, let's understand that this is one of the same credit ratings agencies (along with Moody's) that in the runup to the 2008 financial meltdown conferred inflated ratings on securities known as "collateral debt obligations" that were laden not only with subprime mortgages (that even Goldman Sachs bet against) but also toxic derivatives known as "credit default swaps". Normally, such crud (which in earlier decades bond traders called "Toxic waste") would have been graded at junk level, BB or lower. But what did the genii at Standard and Poor's do? They awarded AAA ratings! This is supposed to only be associated with the safest securities, and hence was a green light for people to buy, including state pension funds (now paying the price for their beliefs) as well as private plans.

So given that this credit agency 'fubared' out the wazoo with those securities' credit ratings, why on Earth should we take them with any level of seriousness now? As Chris Hayes said on MSNBC's 'Morning Joe' today, it's a joke. They lack credibility and by all means the Dems shouldn't be browbeaten by them into any vast spending cut formula that punishes the most vulnerable, as already occurred in Greece. (And we saw how many riots and burning cars erupted there!)

The White House so far appears to be following Hayes' perceptions and dismissed the rating agency's move as a "political gesture" that failed to recognize America's history of political opponents coming together in times of crisis. But will they? That remains to be seen, and despite the evidence that the Tea Party's influence is waning (they're now getting crowds of 200-300 compared to 9-20,000 last year), many Republicans are still using them as a drum with which to beat Dems over the head toward some spending cut frenzy that will leave Granma eating cat food and kibbles.

And we know that 99% of the problem is totally ideological! That is, the Republicans' insistence in pursuing a theory (trickle down) that hasn't been shown to work, period! Even the Reagan former budget director David Stockman has renounced supply side tax cutting bunkum in numerous forums, asserting that raising revenue is just as critical or moreso.

Esteemed Financial Times columnist Clive Crook ('Tax Reform Can Yet Save America', FT, 4/ 18, p. 9) portrayed the purblind GOP attitude in stark and uncompromising terms
:
"Republicans need to admit that maintaining adequate public provision as the population ages requires, as a matter of arithmetical necessity, more revenues. The long term borrowing cannot be solved by cutting spending alone."

Indeed, and I would only further paraphrase Crook's excellent take by stating that: as a population INCREASES, maintaining adequate public provisions requires more revenue. In other words, you simply cannot provide the same level of public support for a population of 310 million that you could for 215 or 250 million! This ought to be common sense, but evidently not to Repugs. Obviously, as a population expands it requires more services, more hospitals, more doctors, more health care delivery, more roads, more schools....more everything! It is stupidity of the basest caliber to try to argue that one must cut government spending to 1990s levels, when the population is 20% more now! Besides, there is a constitutional injunction to see to the population's basic interests and needs, and that is in the Preamble: "to promote the GENERAL welfare".

That doesn't mean military welfare or corporate welfare, but that welfare which benefits the commonweal - including hospitals, roads and schools - which by the way, also means more teachers!

Whether the Repugs get it will be on the national and global center stage by the middle of next month when the nation reaches the $14.3 trillion debt ceiling. Either more funding must be approved then, or the nation goes into default, and the government for all intents will not even be able to send out a single check, whether for disability, Social Security or VA benefits. Do the Repukes really want to test the nation's patience by going to the wall like they did in the budget debate? I hope not, but then with the reptiles you never know! Apparently, so worried is the U.S. Chamber of Commerce that even they've been working hard to persuade the elephant party not to hold up any debt ceiling votes or legislation. They probably also asked the Republicans to put a leash on Teepees!

In that regard, Standard and Poor's warning does have some meaning for the rest of the world and in particular the bond pirates, traders and credit markets. If the U.S. defaults then, the Standard and Poor's negative projection will perversely be seen to be validated.....by default!