Life after D-Day

posted at 8:58 am on August 6, 2011 by Ed Morrissey

Yesterday, as everyone knows, Standard & Poor’s downgraded US credit one notch to AA+, the first time since 1917 that we have fallen below the top AAA rating.  Most people wonder what this will mean for the country and for us as individuals.  How will a lower bond rating affect us?  ABC has a pretty good five-point explanation, but it tends to assume that the rating drop came out of nowhere.  I’ll address them point by point:

  1. US debt service costs will rise — From this point forward, we may have to pay higher yields to get people to buy our Treasury notes.  That’s probably true, but it’s not necessarily a given, since the EU is also in the process of melting down.  There aren’t a lot of options for bond buyers at the moment.  However, ABC’s estimate of around $75 billion a year in increased interest costs in the long run is a pretty good assumption.
  2. Interest rates for individuals and businesses will go up — Again, that might be true, but it’s not certain.  First, banks have trouble getting qualified borrowers now, at least individual borrowers, which is why mortgage and loan interest rates are so ridiculously low.  The bump upwards will cost those borrowers who do get loans more and make them less inclined to borrow, which will force interest rates down again.  Businesses can’t get loans for reasons of qualification, not availability.  Besides, with loan costs at historic lows, a modest rise in rates shouldn’t create much of a problem for healthy businesses and individual borrowers, which more or less negates the next three arguments …
  3. Increased costs will shave 1% off of GDP — I suspect the actual impact will be much less, for the reasons described above.  It won’t help GDP, and it might have a mild impact, but I don’t think it will kill $143 billion in American production in the next year (that’s 1% of GDP).  We have a lot of other policies killing a lot more production and growth than the S&P rating.  We should be worried more about those.
  4. Stock markets could lose 1100 points on the Dow/6-10% from slowing economy — This downgrade could be seen for months, and I think investors more or less priced it into the markets some time ago.  If the economy slows, this could happen, and since Wall Street is all about market psychology, it might happen with the downgrade regardless of whether the economy slows or not, and regardless of why the economy slows.
  5. An increase of 0.5% in interest rates could cost 640,000 jobs — Really?  Did dropping interest rates over the last few years create millions of net jobs?  Don’t forget that interest rates (on loans, not bonds, which is what ABC means here) are at historic lows and we’re still not creating jobs.  This is a kind of Rube Goldbergish assumption that looks at the worst possible theoretical consequences.

There is a lot of anger at the moment in the US over the embarrassment of the downgrade, as well as shock.  I’m most amused by the shock, to tell the truth.  S&P didn’t say anything yesterday that was not common knowledge and common sense.  If you had to rate a potential investment that had an income of, say, $22,000 a year but had costs of $37,000 per year, a standing debt of $143,000, and contracted future debt that exceeded $1 million, would you give that investment a gold-plated AAA rating and buy their bonds at the lowest interest rate possible, or at all?  Of course not, but that’s exactly the fiscal situation of the US, at a 100,000,000:1 scale.

The anger is mainly misdirected.  The media wants to blame the Tea Party, but the Tea Party wants to solve the actual problem — overspending and overcommitment to entitlement programs.  The Tea Party wants to blame the Obama administration, and it deserves some blame for refusing to address the real structural problems of the US fiscal condition.  But that fiscal structure far predates Barack Obama, both as President and as human being, and Congresses and White Houses of both parties have done little to address the real problems in Medicare, Medicaid, and Social Security.

Why?  Because as soon as people try to do so, demagogues accuse them of wanting to push Grandma over a cliff.  Voters respond by punishing the reformers and rewarding the demagogues. If we collectively want to blame someone, we collectively should be looking in a mirror.

What do we do know?  It’s time to acknowledge that Ponzi schemes don’t work, and that entitlement programs are destined for collapse under current parameters.  We can’t possibly tax enough to cover their costs; the problem in this case isn’t revenue as much as it is a lack of suckers on the front end of these schemes.  They worked when the worker-to-beneficiary ratio was 16:1, but not when it’s 3:1 or less.  Most Americans want a safety net for the elderly and the truly disabled, but in order to have that, we have to severely limit the pool of recipients to those who absolutely cannot work to support themselves, not to those who choose not to work to support themselves.  Retirement needs to be self-funded, or not taken at all.  We also need to revamp public-sector pension systems that threaten their own tidal waves of default at the state level to get on top of our national liabilities once and for all.

In short, we need to grow up and realize, as Robert Heinlein once instructed us, that there really ain’t no such thing as a free lunch.

Update: Actually, I underestimated the debt loads by a factor of one thousand in the 100,000:1 scale.  I’ve corrected them above.

Update II: Aargh.  Had the original numbers right and the scale wrong.  Have fixed now.

Breaking on Hot Air

Blowback

Note from Hot Air management: This section is for comments from Hot Air's community of registered readers. Please don't assume that Hot Air management agrees with or otherwise endorses any particular comment just because we let it stand. A reminder: Anyone who fails to comply with our terms of use may lose their posting privilege.

Trackbacks/Pings

Trackback URL

Comments

Comment pages: 1 2 3

I’m confused…
Is it OUR fault, the Tea Party’s or S&P’s ?

Shirley not Obama’s…

golfmann on August 6, 2011 at 1:22 PM

Two other countries with a AA+ rating like the United States are New Zealand and Belgium.

Emperor Norton on August 6, 2011 at 1:25 PM

Oh wow. Belgium. Mmmmm.

disa on August 6, 2011 at 1:52 PM

Maybe I should go with the hobbits instead of the EU…

disa on August 6, 2011 at 1:53 PM

Life after D-Day

Today’s lesson boys & girls is all about the letter D.
Downgraded
Denial
Delusional
Demonic
Democrat

redridinghood on August 6, 2011 at 1:53 PM

In all honesty, Obama and the Dems of 111th just pushed us off the cliff. The spendthrift policies of many congresses brought us to the edge of the cliff.

Still, if you can’t learn what the mistakes were in the first place, you cannot choose a corrective course.

For what it’s worth, I do believe Obama is planning the US’s downfall, he just doesn’t want to be seen to be doing it. Hence all of the flimflam speeches.

What I want the Tea Party to insist upon now is broadcasting all debate on C-Span. No more secret-room b.s.

Time to eat your peaz, boyz ‘n’ girlz.

disa on August 6, 2011 at 1:58 PM

More bad news. The German magazine Der Spiegel is reporting that Germany has now decided not to help bail out Italy.

It Just Went From Bad To Far, Far Worse As Germany Says Italy Is Too Big For EFSF To Save, Refuses To Carry Euro Bailout Burden

Emperor Norton on August 6, 2011 at 2:00 PM

This downgrade is nothing more than a coordinated attempt by S&P to help Obama get the tax increases he wants. And because of that brilliant move by Republicans to approve of the new super committee, he’ll get them.

xblade on August 6, 2011 at 2:02 PM

Trump was on last night and called our political class stupid. Hard to disagree.

Ds have an ideology that has been shown to be stupid, and are just craven pols using the levers of the power of graft and their state run media to give themselves a great life. Stupid is their friend.

Rs can not manage to communicate. They’ve come close…but here’s a hint for the sunday news shows. ok, we are borrowing 40 cents on the dollar.

that means that ALL TAXES would have to go UP by 66 PERCENT NOW. Example, you paid 10K last year, this year you pay 16K. That’s just NOW. The FUTURE is WORSE

OK so you MORON MEDIA types…is that what you WANT???? MORON???????? And how will that impact the ECONOMY…MORON????

But sadly no, they’s f this up too…they always do

r keller on August 6, 2011 at 2:05 PM

Again unseen, “you” are not the problem. People with your concerns, are not the problem.

hawkdriver on August 6, 2011 at 10:35 AM

You are exactly right. The question is: do we cut the takers off now, or do we allow them to take us all down with them, because those are the only two alternatives.

Hiya Ciska on August 6, 2011 at 12:06 PM

In some people’s world the idea that farmers are given money not to grow crops or to grow more corn for ethanol or that home buyers are enticed to buy outside of their means with promises of interest write offs, is a firm part of the constitution and an entitlement that is sacrosanct and as holy as the Bible.
It is easy to say go after “those people” who are sucking the gov teat as long as you don’t have to take your lips off the other teat.
Some commenters live to keep their heads buried firmly in the dirt.

— Hal Jordan for president!

Bradky on August 6, 2011 at 2:05 PM

Subsidies?

Straw Man of the first order. People paid into SS and are now being told to expect to not receive it. Or receive it later. Where is the freaking correlation?

For God’s sake

hawkdriver on August 6, 2011 at 2:09 PM

Ed, this is the best article I’ve read on the downgrade mess.

My own shock at the downgrade is more emotional than rational. I know that we’ve been running on smoke and mirrors for a long time but it’s still hard to see the US get downgraded.

Django on August 6, 2011 at 2:15 PM

Why? Because as soon as people try to do so, demagogues accuse them of wanting to push Grandma over a cliff. Voters respond by punishing the reformers and rewarding the demagogues. If we collectively want to blame someone, we collectively should be looking in a mirror.

I absolutely agree with this. We complain that the politicians do not do enough to fix the problems and they do not tell us the truth…but what happens to politicians that tell us the truth? They lose.

I think both sides played politics with the debt ceiling. When Michele Bachmann would not even vote for the Cut Cap and Balance bill, that was politics. And when the Democrats would not allow more than 2.4 trillion in spending cuts without taxes..that was politics too. They knew the Republicans would not do that. And in the end, we got a deal that was better than nothing, but not good enough.

I hope the Super Committee has the political courage to make the tough choices that will have to be made..and even then more will have to be done.

Terrye on August 6, 2011 at 2:15 PM

— Hal Jordan for president!

And as intelligent as you like to sound, you’re juvenile in the first order to boot.

hawkdriver on August 6, 2011 at 2:16 PM

xblade on August 6, 2011 at 2:02 PM

You are correct in that we are hugely exposed. The super congress is a huge risk. We need Republicans who will not raise taxes, if there are 3 such Republicans in both the house and senate. Because of the mistakes the Republicans already made, that means we probably are in for defense cuts.

GaltBlvnAtty on August 6, 2011 at 2:17 PM

My own shock at the downgrade is more emotional than rational. I know that we’ve been running on smoke and mirrors for a long time but it’s still hard to see the US get downgraded.

Django on August 6, 2011 at 2:15 PM

This is true.

Terrye on August 6, 2011 at 2:17 PM

The German magazine Der Spiegel is reporting that Germany has now decided not to help bail out Italy.

Why don’t they want to offer their necks to the sexy vampires of the EU?

disa on August 6, 2011 at 2:23 PM

This downgrade is nothing more than a coordinated attempt by S&P to help Obama get the tax increases he wants. And because of that brilliant move by Republicans to approve of the new super committee, he’ll get them.

xblade on August 6, 2011 at 2:02 PM

I wondered about this myself. I read this from James Joyner:

S&P says the downgrade “reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” While that may well be, it’s more than we were doing a month ago. Indeed, while most sane analysts agreed that the showdown over the debt ceiling was irresponsible, without it there would have been no fiscal consolidation plan at all.

Yet, John Chambers, chairman of S&P’s sovereign ratings committee, admits the downgrade “was pretty much motivated by all of the debate about the raising of the debt ceiling,” saying “It involved a level of brinksmanship greater than what we had expected earlier in the year.” But that’s an evaluation of process, not outcomes. And, again, the outcome was to actually start addressing the long-term debt problem.

Additionally, S&P apparently issued its judgment based on a $2 trillion error in its baseline assumptions. Considering that this more than accounts for the medium-term impact of keeping the “Bush tax cuts” that they so disdain in place, that would seem significant. But, having their embarrassing error pointed out to them, they decided to stick with the downgrade anyway.

I would disagree that the Super Committee is a bad idea..that can work both ways. It can also light a match under the Democrats to talk about more cuts. My guess is it puts more pressure on both parties. But I do think they want to see taxes go up.

Terrye on August 6, 2011 at 2:25 PM

I think both sides played politics with the debt ceiling. When Michele Bachmann would not even vote for the Cut Cap and Balance bill, that was politics.

Terrye on August 6, 2011 at 2:15 PM

Would you say that every vote cast was “playing politics” or only the “no” votes? Or only the “no” votes by Dems? Or only the “no” votes by conservatives?

disa on August 6, 2011 at 2:31 PM

Where to go?

Coburn’s Back in Black!

Tom Coburn has the only serious plan in Washington DC. The first link shows the savings by category that add up to $9 trillion. The second link details what he would do by category.

One Senator who tells it like it is:

Senator Coburn (R-OK) somehow, yesterday, got up front on the floor of the Senate and told the straight unvarnished truth and followed that up with solutions to the problems he outlined.
[...]
The whole presentation (Mr. Coburn’s, that is) is well worth listening to as it shows there are a few Senators that have the potential to be statesmen instead of just politicians.

Alas…

The only serious proposal to reverse our course and steer away from the approaching iceberg was made by Tom Coburn a couple weeks ago. It was scorned by the ideologues on both sides of the aisle, as it slashed military spending, closed corporate and individual tax loopholes, ended subsidies, and really addressed Medicare and Social Security rather than changing the CPI index. It was DOA and so is this country.

Rae on August 6, 2011 at 2:33 PM

When Michele Bachmann would not even vote for the Cut Cap and Balance bill, that was politics.

Terrye on August 6, 2011 at 2:15 PM

You say ‘politics’, I say ‘principle’.

The ones who swore they wouldn’t vote for and then did – *that* was politics.

Midas on August 6, 2011 at 2:47 PM

We only kicked the can further down the road with the agreed upon debt deal, increasing the difficulty of recovering before the point of no return. Time is not on our side.

The US has been attempting to avoid accountability for years in managing our resources and our government in a corrupt manner; we have been attempting to thwart the principle that “whatever you sow, you will reap.(Gal 6:7-8.)” We have sown corruption, and now, we are beginning to experience the disasterous consequences of ignoring this life principle. It is an unchangeable principle of God which applies to individuals, and to nations.

If every thinking American does not now become a Tea Party supporter, we will have to explain to the younger generation why America is no longer an “exceptional” nation; no longer the land of opportunity; no longer a superpower having ceded power to China, and Russia, and the United Nations; and no longer the beacon of liberty and hope in this world, and no longer the most blessed nation on earth. It seems like our last hope is November of 2012. I pray that enough Americans will wake up before it is too late.

SheetAnchor on August 6, 2011 at 2:49 PM

I think both sides played politics with the debt ceiling. When Michele Bachmann would not even vote for the Cut Cap and Balance bill, that was politics.

Terrye on August 6, 2011 at 2:15 PM

Would you say that every vote cast was “playing politics” or only the “no” votes? Or only the “no” votes by Dems? Or only the “no” votes by conservatives?

disa on August 6, 2011 at 2:31 PM

That is an interesting question, it really is.

I think that when the Republicans voted for the Cut Cap and Balance, they were honestly voting for what they thought was right. I think when Bachmann voted against it, she was playing politics because she is running for POTUS. I think that some of the Democrats probably did what they think was right too, because they are ideologically driven to take from the rich and give to the poor..or so they say.

However, I do think that partisan politics has driven both parties further apart and made it more difficult to come to consensus. Believe it or not, it is possible to play politics with a vote and still think you are in the right.

But it does not help the rest of us who have to deal with the results.

Terrye on August 6, 2011 at 2:58 PM

If every thinking American does not now become a Tea Party supporter, we will have to explain to the younger generation why America is no longer an “exceptional” nation; no longer the land of opportunity; no longer a superpower having ceded power to China, and Russia, and the United Nations; and no longer the beacon of liberty and hope in this world, and no longer the most blessed nation on earth. It seems like our last hope is November of 2012. I pray that enough Americans will wake up before it is too late.

SheetAnchor on August 6, 2011 at 2:49 PM

So far, I have seen a lot of people blaming the Tea Party for the downgrade. Blaming their stubborn refusal to raise taxes, their brinkmanship..whatever.

Never mind the fact that the debt is not there because of the Tea Party, the Tea Party is there because of the debt.

People have no problem ignoring that simple fact. Most people when polled, want to raise taxes on the rich..as if that would actually solve this problem anyway.

Terrye on August 6, 2011 at 3:03 PM

When Michele Bachmann would not even vote for the Cut Cap and Balance bill, that was politics.

Terrye on August 6, 2011 at 2:15 PM

You say ‘politics’, I say ‘principle’.

The ones who swore they wouldn’t vote for and then did – *that* was politics.

Midas on August 6, 2011 at 2:47 PM

The thing is one of the reasons the Tea Party is being blamed for the downgrade is that there were some Tea Party members who refused to vote any increase in the debt ceiling, even when they had a bill like Cut, Cap and Balance…so when the folks who do not like the Tea Party want to point to people who are so intransigent that they will not support any kind of debt deal even if a down grade from every agency would happen is such a deal does not happen..then they do not look like reasonable people. In other words, if Michele Bachmann had her way, it would not only be S&P who downgraded the US. That is why I think it was politics. I do not think that she thought for one minute that the debt deal would not take places..she was just using the issue. The same way Obama used the issue when he was a Senator from Illinois.

Terrye on August 6, 2011 at 3:08 PM

Never mind the fact that the debt is not there because of the Tea Party, the Tea Party is there because of the debt.

Terrye on August 6, 2011 at 3:03 PM

Wow, may I use this?

hawkdriver on August 6, 2011 at 3:09 PM

Never mind the fact that the debt is not there because of the Tea Party, the Tea Party is there because of the debt.

Terrye on August 6, 2011 at 3:03 PM

Wow, may I use this?

hawkdriver on August 6, 2011 at 3:09 PM

Be my guest.

Terrye on August 6, 2011 at 3:15 PM

— Hal Jordan for president!

Bradky on August 6, 2011 at 2:05 PM

Thanks SO much for sharing that.

Del Dolemonte on August 6, 2011 at 3:36 PM

You pay 6.2% of your income a year. For someone working 40 years and making $50K a year (which is well above average for the past 40 years) that’s $124K total money contributed. If you live another 20 years from retirement that would mean you’re entitled to $6200 a year. Yet in reality you will be getting checks equal to 300% of what you’ve put in.

Basic math shows that 1+1=2. Yet in Social Security Ville 1+1 = 17. And no politician has the balls to say otherwise.

angryed on August 6, 2011 at 11:09 AM

While your basic premis is OK, but…
1) Employers also pay 6.2% on your behalf. Technically, if everyone understood the fact that companies never just give benefits out of their pockets, rather, it IS part of your pay that they withheld from you. I go go on and on othis, but in short, let’s just say that if you were paid $25/hr, and you had $5/hr in bennies, you are actually earning $30, but the tax code doesn’t recognize that. While some items are mandated, others are discretionary in that the company determines what it will withhold from you and call it a benefit. This is why I’m a 1099 — give me ALL of my money and I’ll determine my distribution of spending, investments, insurance etc.

2)The tax rate wasn’t always 6.2%. For someone that already worked 40 years, I forget how much the rate has grown, but I seem to remember in the 70s HS accounting that the combined rate was 6.x%. So in actually, workers have contributed even less than your figures, compounded interest included.

BLUF, all ponzis will come to an end and it won’t be pretty. We always assumed that it would fall on our kids and grandkids, but it’s hitting us current workers as well.

AH_C on August 6, 2011 at 4:25 PM

This economic fallout analysis is highly tendentious. Sounds like it is being minimized. The political fallout is far more important.

The market (including S&P) is saying the debt-ceiling deal was not a solution (we knew that), and that a solution is still needed. Moodys will now feel less pressure to hold-off their downgrade, so there could be a landslide of loss-of-confidence, that shows itself economically in a thousand ways beyond the points mentioned.

Those wanting tax increases are delusional: 51% pay no income tax at all. Stopping the mortgage interest tax deduction as a “loophole” will represent a massive tax increase for the middle class, rents will go up to compensate and the real-estate market will go into full nose-dive.

Here’s a solution: defer all current spending, cut all government spending on all programs by a fixed percentage – no sacred cows, not even defense, not even social security.
The government can go on furlough or make reductions in staff, just like any business has to do.

This is no time for compromise. If it means that Washington passes no legislation between now and 2012 that will be a net savings.

virgo on August 6, 2011 at 4:48 PM

BLUF, all ponzis will come to an end and it won’t be pretty. We always assumed that it would fall on our kids and grandkids, but it’s hitting us current workers as well.

AH_C on August 6, 2011 at 4:25 PM

Hah! Even if I didn’t know you were military from our conversations, I’d be able to tell. But in honor of the thread theme, BOHICA America.

hawkdriver on August 6, 2011 at 5:34 PM

Sounds like we need a turn-around specialist in the white house. And a like-minded congress willing to support him.

Rod on August 6, 2011 at 5:40 PM

must-see spectacle, the whole liberal media unleashed against S&P :-), marching disciplinly on order from WH and its occupant and dumping on S&P….all the Times pubications are outrageously outraged and got their panties in a bunch over the S&P’s audacity to downgrade our bonds, they got some nerve these British and Canadian S&P ‘basterds’ :-)… sure, go ahaead, shoot the messenger :-), so typically left…Krugmans and Joe Kleins of the world, unite! (in your enormous ignorance that is)

jimver on August 6, 2011 at 6:08 PM

Let’s face the facts:

There is no amount of tax increase which can sustain spending at the current rate: Democrat and Republican “big spenders” have truly run out of other people’s money. Confiscating ALL of the income of “the rich” would not net enough money to run the country for 24 days at the present rate of spending.

So the only practical choice is between:

1. Taking charge of the spending and forcing it DOWN in a painful, but controlled and systematic, manner.

…or…

2. Ignore the problem and let a combination of taxes, fees, and devaluation of the dollar force the economy underground. This would cause the government to lose total control of the economy, and would, in essence, amount to a bloodless coup which replaces the irresponsible government with a “wild west” free-for-all economy controlled by a mixture of strong men, strong companies, and strong local governments.

We are now at the end of a blind alley created by Socialism and the quixotic attempts of crazed “environmentalists” to repeal the laws of physics by bribing natural forces with our money.

landlines on August 6, 2011 at 6:24 PM

Ever since the abysmal Kelo decision by those vain nobles in robes called our Supreme Court the question has become what denotes one’s private property when New Canaan, Connecticut can eminent domain it directly out from under you so as to supply it to political cronies.

Not to mention that a lawless and fully irresponsible dictator should not surprise when the lazy Supreme Court refused to address (diversity riot control excuses notwithstanding) even the simple question of natural born as regards eligibility to hold such office.

viking01 on August 6, 2011 at 6:31 PM

If you had to rate a potential investment that had an income of, say, $22,000 a year but had costs of $37,000 per year, a standing debt of $143,000, and contracted future debt that exceeded $1 million, would you give that investment a gold-plated AAA rating and buy their bonds at the lowest interest rate possible, or at all?

No I would not, Ed. Not at all. Not even at 50% per annum.

JohnGalt23 on August 7, 2011 at 12:58 PM

Rae on August 6, 2011 at 2:33 PM

Great post, Coburn has it right. Thanks for taking the time to put this together. Bravo.

highninside on August 7, 2011 at 1:46 PM

Comment pages: 1 2 3