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S&P Threatens to Downgrade U.S. Credit Rating (er, Japan, excuse me)

Econophile's picture




 

From The Daily Capitalist

TOKYO—A credit-ratings firm issued a warning to Japan's new government about the country's borrowing, threatening to downgrade the nation's sovereign debt unless policy makers find a way to pull the economy out of its deflationary spiral while curbing public spending.

 

The statement from Standard & Poor's on Tuesday was the first formal declaration of concern from a ratings company about Japanese borrowing in the months since investors began to raise questions about the sustainability of government debt, estimated to have reached the size of the country's entire economic output for the year ending in March—the highest level in the industrialized world.

I predict the U.S. will receive a similar warning. It will read like this:

WASHINGTON D.C.—A credit-ratings firm issued a warning to the United States government about the country's borrowing, threatening to downgrade the nation's sovereign debt unless policy makers find a way to pull the economy out of its deflationary spiral while curbing public spending.

 

The statement from Standard & Poor's on Tuesday was the first formal declaration of concern from a ratings company about U.S. borrowing in the months since investors began to raise questions about the sustainability of government debt, estimated to have reached the size of the country's entire economic output for the year ending in March—the highest level in the industrialized world.

Yes, I just switched the word "Japan" for "U.S."

There is no question that the U.S. is headed in this direction. Presently our GDP is about $13 to $14 trillion, and national debt is about $12.3 trillion. The news today is that the budget deficit is (shock!) higher than expected: $1.417 trillion. President Obama will announce in his State of the Union address that they will put a three year freeze on discretionary spending. The freeze will impact only 17% of the budget or $447 billion this year out of a $3.5 trillion federal budget. Defense, social security and Medicare will remain untouched. They expect to save $250 billion over 10 years. Ho hum. I understand you've got to start somewhere, but this is a small fraction of the real problem.

At the same time:

Obama and Vice President Joe Biden yesterday announced proposals for a package of tax cuts aimed at middle-income Americans that include an increased tax credit for child care and an expansion of tax credits to match retirement savings.

The White House also is backing a $154 billion jobs bill that passed the House last month. In addition, the president said Jan. 19 that he will add $1.35 billion to his budget for an education program to improve students’ test scores.

But ... This is one of those comic John Stewart moments when he gets flustered over obvious inconsistencies. But don't worry Obama will appoint a commission to resolve all of this.

By some estimates the national debt will double by 2019 and could balloon up to about $24 trillion. We'll get the dead fish from S&P long before that occurs.

Since we are pursuing the same Keynesian stimulus policies as is Japan, we will run into the same problem: a stagnating economy. Which means OMB predictions of tax revenues will be lower than budgeted.

The one thing that Japan has is savings. Their national debt is financed almost entirely by internal savings: "[S&P] noted Japan's status as the world's biggest net creditor, massive foreign reserves and the yen as a reserve currency."

While U.S. savings are growing, more than 30% of our debt is financed abroad. Which means China, Japan, U.K., Canada and other debt holders are concerned.

This means that the Administration is worried, especially after all of its promises to China. Since they can't cut spending significantly, there will be consequences:

  1. Further decline of the dollar.
  2. Higher debt costs because of sovereign credit downgrades.
  3. Increased taxation, specifically a form of sales tax or VAT.
  4. Slower growth as government sucks more capital out of the economy.
  5. Inflation, as the government needs to pay off debt with cheap dollars.

I am not looking forward to the day when politicians realize there are economic consequences from their political decisions. The irony will be too great and we all will suffer from their ignorance.

 

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Wed, 01/27/2010 - 20:27 | 208481 Carl Marks
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Do you think the parasites (voters) are ready to give up their subsidies?

Wed, 01/27/2010 - 19:51 | 208446 Thoreau
Thoreau's picture

Most of us will either be dead or in our bunkers by the time S&P downgrade Uncle Sham.

Wed, 01/27/2010 - 18:38 | 208385 Noah Vail
Noah Vail's picture

GDP is $13 trillion, that's a hoot. GDP includes government spending of borrowed and taxed money, plus service sector revenue that produces nothing. The real productive GDP is more like $8-10 Trillion. Try recalculating the debt ratio on that number.

Wed, 01/27/2010 - 18:05 | 208338 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The inflation from monitary expansion won't do the job alone anymore.  Time to Devalue!  Unpeg China, and most likely the Doelarr loses 15% overnight (although Reg said the inverse might happen and the Yuan could weaken...this is worth considering)  However, in a year or so, inflation will do it's master's final bidding and take out the rest of the world's wealth (gold snitches!).  they better devaulue while they have the chance! 

Wed, 01/27/2010 - 16:59 | 208237 ATG
ATG's picture

S&P downgrade on USA before they default?

Right on the heels of United States District Court

Judge Lewis Kaplan dismissing $96 Billion of MBS

rating claims from the bench in his courtroom in

the Southern District of New York?

Not likely...

http://www.jubileeprosperity.com/

 

Wed, 01/27/2010 - 16:25 | 208180 Anonymous
Anonymous's picture

"Since we are pursuing the same Keynesian stimulus policies as is Japan, we will run into the same problem: a stagnating economy."

Hm, wonder what's this all 'bout huh...

Wed, 01/27/2010 - 16:22 | 208173 Anonymous
Anonymous's picture

politicians? who voted for these clowns the last 30 years? (I date eveything back to the Malaise Speech)

Wed, 01/27/2010 - 12:06 | 207704 Anonymous
Anonymous's picture

dont get it please explain

Wed, 01/27/2010 - 11:28 | 207604 Artful_Dodger
Artful_Dodger's picture

I thought that most Japanese Gov. debt was held domestically...how would this effect the yen other than the Japanese ability to buy more treasuries?

 

 

Wed, 01/27/2010 - 11:12 | 207581 Anonymous
Anonymous's picture

1) an expansion of tax credits to match retirement savings -
Is that a means to get more money into 401k plans and force it to buy treasuries ??
2) The one thing that Japan has is savings.- WRONG !! Personal savings rate in Japan has now dropped from a 1990 high of 20% + to about 2 %. The retirees are in DEEP DEEP trouble.

Wed, 01/27/2010 - 18:25 | 208362 Econophile
Econophile's picture

Yes, but they finance almost all of their debt internally. Lots of savings through the postal savings system.

Wed, 01/27/2010 - 10:49 | 207558 A Man without Q...
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It is forbidden for the ratings agencies to downgrade the US, on grounds of national security.

Wed, 01/27/2010 - 10:29 | 207528 Anonymous
Anonymous's picture

I had a bizarre dream last night. I was watching a chart of the USDEUR... And suddenly after the turn of midnight on a new year's change, the EURUSD started ticking up from 1.40...1.50...1.60..1.80..2.40...2.90 just like that. The news came out the next day the US govt just issued $3T in new money in one day.

Bizarre dream eh? I was excited to see the status of my gold position, but kitco's website was down as it was the weekend. I imagined gold would gap up to 2000/oz.

Wed, 01/27/2010 - 11:37 | 207623 Master Bates
Master Bates's picture

Yeah, you were certainly dreaming.

Gold isn't going to 2000/oz.  Also, if there were that many dollars printed, there would likely be more Euros printed as well.

It'd take more money being printed than 3T to get currency to debase that much, which is the fundamental reason you're not going to see gold at 2000.

Wed, 01/27/2010 - 21:57 | 208549 Anonymous
Anonymous's picture

So both currencies would then devalue against commodities and precious metals such as gold. Commodities are in a limited amount relative to fiat currency which is potentially unlimited. No not necessarily, it depends also in part on how it effects the treasury market. If yields then soar out of default or inflation risk, money could be placed in gold. By the way even then gold market operates with a different dynamic. There are massive short positions in gold, it is unclear as to whether that is even coverable. If gold say even jumps higher to even 1600 in a short amount of time. JPM and the big consolidated shorts in gold are going to have a very very rough time. By the way the same credit bubble that is sustaining asset prices is also sustaining the US dollar bubble. If US creditors go bankrupt, they would be forced to liquidate their fx reserve.

Wed, 01/27/2010 - 10:09 | 207504 Daedal
Daedal's picture

I'm not holding my breath.

Any downgrade on American debt will be too little too late. The downgrades should've been made the day the debt ceiling got extended, and they should've been brutal. (If you want to get really technical, the downgrades should've been made long ago).

Instead, rating agencies are complacent as they have ever been, only offering lip service to make themselves appear relevant.

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