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Downgrading Obama's Economy   August 7th, 2011
More downgrades are likely until we upgrade to a new president       


More observations...

S&P's decision last Friday to downgrade the U.S.'s rating to AA+ is indicative of America's general decline under President Obama.

No-one will argue that Obama didn't inherit an ugly economy. And few will argue that the spending that's been created over the decades is anything but a bipartisan catastrophe. But only one side was even making a token effort to reduce the deficit during the debt ceiling debate. Only one side proposed a plan which would have met S&P's $4 trillion deficit reduction requirement.

Obama and Democrats have been ignoring reality.

As recently as four months ago "Treasury Secretary Tim Geithner said Tuesday there is "no risk" the U.S. will lose its top credit rating." Early on the president was asking for a "clean" debt ceiling bill with no spending reductions at all, an idea that Democrats brought back in the days before a final agreement. And throughout the debt ceiling debate--on which some Republicans tried to hold the line by demanding real cuts or a balanced budget amendment--we were told by the president that "If we don't do that, if we don't come to an agreement, we could lose our country's triple-A credit rating."

And now that S&P has downgraded the United States, the administration is whining:

That is why the President pushed for a grand bargain that would include all of these elements and require compromise and cooperation from all sides. Over the coming weeks the President will strongly encourage the bipartisan fiscal committee as well as all members of Congress to put our common commitment to a stronger recovery and a sounder long-term fiscal path above our political and ideological differences.

So, not surprisingly, the president is trying to make the case that the downgrade demands tax increases. In a recession, no less.

But for Obama and Democrats to borrow, print and spend trillions of dollars over the course of the last several years over the vocal objections of Republicans and American citizens; to propose that the debt ceiling be raised without any spending cuts whatsoever; and for the president and others to rush to increase the debt ceiling based on fear-mongering about a rating downgrade that would punish our economy; and to now complain when our rating is downgraded due to insufficient deficit reduction is utterly absurd.

Now the story is that the rating downgrade is no longer a big deal, and the spin is that there will be no long-term damage to the markets because, supposedly, they knew this was coming and priced it into the 700 point drop last week: "But any losses might be short-lived. The threat of a downgrade is likely already reflected in the plunge in stocks this week, said Harvey Neiman, a portfolio manager of the Neiman Large Cap Value Fund. "The market's already been shaken out. It knew it was coming."

If the market knew the downgrade was coming, so did the White House, Democrats, and Republicans that voted for the debt ceiling agreement. And since we know we wouldn't have defaulted but rather would have just had a partial government shutdown, there was no reason to not hold out for real spending cuts that might have been enough to warrant a continued AAA rating.

Of course the Obama administration protested the decision to downgrade America's debt. The administration claims that S&P's math was off by $2 trillion. While S&P acknowledged the error, they stated that it does not materially change the fact that trillions of dollars of new debt will push us further beyond 100% of GDP over the next decade. And it doesn't. Whether we add $7 trillion, $9 trillion, or $15 trillion to our debt over the next decade, the reality is the same: We're digging a deeper hole from which very few countries successfully extricate themselves.

The fact that an American president is even having a discussion of whether or not a U.S. downgrade is appropriate is evidence of how far we've gone in the wrong direction.

In response to the implications of the downgrade, Christine Romer--President Obama's first chair of the White House Council of Economic Advisers--stated on Bill Maher's show that "The U.S. is "pretty darn fu**ed." While we can question her sense of humor on the Maher show, the reality is not far off.

The only reason we haven't collapsed in the way of Argentina, Yugoslavia, Zimbabwe, Greece, Ireland, and Portugal (with Spain and Italy waiting in the wings) is because we issue the world's reserve currency. Yet, for years, there have been increasing calls to find (or create) a new reserve currency. This will only increase the pressure.

Indeed, China--a major holder of U.S. debt--is not at all pleased with the downgrade. China's state paper wrote on Saturday, "The lowering of the United States' long-term sovereign credit rating has sounded a warning bell for the international currency system dominated by the U.S. dollar."

Of course the loss of reserve currency status would mean that the U.S. would lose a lot of its sovereignty in making our own decisions. Just as Greece has been subject to the dictates of foreign entities in fixing its problems, so will the U.S.

In fact, China responded to the downgrade stating:

China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets. To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means. It should also stop its old practice of letting its domestic electoral politics take the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits.

It would seem that, though we haven't defaulted, foreign entities--in this case China--are starting to object very vocally, and asserting their "right" to demand that we address our debt problems. While its recommendation that we live within our means is reasonable, one wonders how exactly anyone could stop our domestic politics from having the impact they do... at least without eliminating domestic politics. And one has to cringe that a communist country is in a position to lecture us on sound economic principles.

In the days to come as the tax spin ramps up, we should widely repeat the fact that S&P takes no position on whether we should reduce our deficit by spending cuts or tax increases. Their statement read "Standard & Poor's takes no position on the mix of spending and revenue measures... for putting the U.S.'s finances on a sustainable footing." So S&P isn't making an argument for higher taxes... it's only making an argument for lower deficits and more manageable debt.

As we move forward and the White House, Democrats, and the legacy media try to make the case that this downgrade demands tax increases, we need to keep in mind that we don't have a revenue problem. In 1991 the government's revenue was $1.054 trillion while in 2011 it's estimated at $2.174 trillion. In that same time expenditures went from $1.3 trillion to $3.8 trillion.

So even though our tax revenue has more than doubled, the problem is that our spending has almost tripled. We don't have a tax problem--we have a spending problem.

Conservatives have been sounding the alarm regarding our unsustainable deficit spending for years. We've said it would eventually have destructive consequences. Last Friday, S&P joined the chorus. I suspect that before too long the other ratings agencies will gather the courage to join S&P in downgrading our government's debt. Obama's protests of the downgrade are ultimately unpersuasive when many of us have been warning about our weakening financial situation for years.

But as the president and Democrats try to use the downgrade as a pretext for "a balanced approach" (that is, raising taxes) we must remember that we're dealing with an inherently unbalanced problem. When the problem is too much spending, it can't be fixed with more taxes without killing jobs and further damaging the economy and making us even less creditworthy.

The balance that is actually lacking is the balance between government and the private sector. Government has grown far too much at the expense of the private sector. A balanced approach will not only reduce government spending, but will reduce the size of government.

Then our economy will regain its strength, create jobs, and we'll once again flourish.

Until then, expect more downgrades of Obama's economy.

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