Life after D-Day

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.