Next Comes The US Downgrade

Tyler Durden's picture

From SocGen:

The scaled-down deal passed in the Senate addressed the fiscal cliff but did nothing to address longer term fiscal health of the nation. This puts the US rating at risk for a downgrade. However, credit rating agencies may decide to wait and see what emerges from the subsequent talks. There is an implicit new cliff at the end of February related to the sequester and to the expected exhaustion of extraordinary measures related to the debt ceiling. This date is expected to be used by Republicans as leverage for spending cuts. President Obama has already signaled that a new round of spending cuts – those related to the sequester as well as entitlement spending – will have to be matched by additional revenue increases. Therefore entitlement and tax reform are likely to be at the center of discussions over the next two months.

And recall from Moody's in September:

Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government's Aaa rating and negative outlook, says Moody's Investors Service in the report "Update of the Outlook for the US Government Debt Rating."


If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, says Moody's.


If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1.


Moody's views the maintenance of the Aaa with a negative outlook into 2014 as unlikely. The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock—such as would occur if the so-called "fiscal cliff" actually materialized—which could lead to instability. Moody's would then need evidence that the economy could rebound from the shock before it would consider returning to a stable outlook.


Moody's notes that it is difficult to predict when during 2013 Congress will conclude negotiations that result in a budget package. The Aaa rating, with its negative outlook, is likely to be maintained until the outcome of those negotiations becomes clear.


The rating outlook also assumes a relatively orderly process for the increase in the statutory debt limit, says Moody's. The debt limit will likely be reached around the end of this year, and the government's ability to meet interest and other expenses out of available resources would likely be exhausted within a few months after the limit is reached.


Under these circumstances, the government's rating would likely be placed under review after the debt limit is reached but several weeks before the exhaustion of the Treasury's resources. Moody's took a similar action during the summer of 2011.

Several weeks before the exhaustion of Treasury's resources is.... now.

For those still confused, nothing has changed on the US long-term sustainability picture. In fact, as the CBO announced yesterday, deficits will rise by $4 trillion (so really $10 trillion) over the next decade. But the music is playing and one must dance....

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Shizzmoney's picture

What is taking them so long to downgrade? 

Are they waiting for the King of Bankruptcy Debt, Donald Trump, to become president?

GetZeeGold's picture



They were still in shock at the marxist being elected twice.

Dr. Sandi's picture

I don't remember Marx advocating government subsidization of the private banking sector. Maybe I missed something from my commie profs.

HardAssets's picture

Its all one big insider controlled monopoly, whether called 'public' or 'private'.

The 'isms' are just marketing.

FMR Bankster's picture

Not much to like about this budget deal. However, there's one positive. Most of the largest budget gimmicks (alternative min tax, expiration of Bush tax cuts, doc fix, ect)went away and the real size of the deficits for the next 10 years are exposed. When the CBO and Obama's budget group put out the next figures we will be looking straight in the eyes of $10-11 trillion in new debt the next decade. Of course that assumes no recession (hasn't happened since at least the civil war)and interest rates stay very low. I know, I know, your thinking we'll have some spending cuts when the republicans hold Obama's feet to the fire next month. Sorry about that, because the $10-11 trillion ASSUMES the cuts defered for 60 days happens and that's $1.2 trillion. Anyone think they will agree on cuts that large? Thought so.

odatruf's picture

FMR - doing away with those budget fictions is about the only bright spot, I agree.

I am undecided on whether separating the tax side and spending side of the problem is positive. Most people support cutting spending (so long as it isn't too specifically detailed or targeted at their stuff) and I think it is easier to talk about run away spending and debt without 'defending' not increasing taxes on the well off. So long as people remember they got their pound of blood from the Romneys of the world, then building support for doing away with some of government's excesses may be easier than it was while still under the cloud of screeds about the fair share.

The only reason not to think it is better this way is my own distrust that even a plurality of the GOP would see spending go down. Sure, they may want it to slow for the lefty stuff, but they have their own grab bag of righty stuff they want funded, including anything the DoD wants plus some.


FMR Bankster's picture

Anyone who has looked at the real numbers understands it's an out of control situation. Not a question of simply trimming a few wastful programs and modestly increasing taxes. The only solution that could work is to walk back the transfer of power from local and state goverments to the federal goverment. If you ended federal payments for some programs the states administer (unemploymnet compensation for example) and block granted back others that cost more (medicaid)you could regain control over 5 or 6 years. Of course the states would cut these programs a bunch and taxes would rise at the state and local level. As long as the Federal goverment cuts the checks and doesn't raise taxes to pay for them, there's little inclination to fix things. Many voters understand this. Look at all the states that send Democrats to Washington (West Virginia is a good example) where the freebies come from but elect Republicans for state and local office because balanced budgets are required there.

odatruf's picture

FMR - I agree that the only real way to get a handle on it that might be lasting would be a significant devolution of power and responsibility back to the states. Something to which the GOP has only paid lip service.

We'd all need to understand that our state taxes were going up as a result, but that can be offset by the reduction in federal taxes. And that exchange would need to be written in blood. As you say, the local budget rules as well as the leverage of smaller groups might stand a chance of keeping it in some balance.

Even then, I think it would take two full decades to pay down the legacy items taken on by the feds. It could not be done as fast as 5 or 6 year in my view, but if there were a credible and enforceable plan, the timing would not be as important so long as it got done.

It's time to reopen the constitution at a new convention. It's well past time, honestly. The only thing I would insist upon would be that no one could serve at the convention if they've ever held any elected office and that person would be barred from ever holding office after the convention.  This rule would need to be added as part of the amendments being made at that time, of course. I also think the delegates should be chosen at random like jury duty and they should be compensated very well.


GetZeeGold's picture



Marx wasn't elected President....therefore he never saw the light.

nonclaim's picture

I'm mixed about this but gave a +1 anyway... At this point accusing Marx is like blaming Bush for all things wrong.

Call it for what it is... call them Obamists for it is Obama and his backers that are sinking the country.

kridkrid's picture

NO!  That is a distraction.  People need to understand what they are witnessing.  This has NOTHING to do with politics.  That's all a charade meant to equally divide people into controllable "camps".  We have selected a monetary system in which all money is loaned into existence with interest attached at creation.  Only the system doesn't contain both the principle and the interest to pay the debt so more debt must be issued, forever.  

The system is agnostic with respect to who is saddled with the debt, only that debt continues to grow FOREVER.  "google" any image you would like and you will find a nice rational curve with respect to private and public debt.  The problem... people can only take on debt for so long before they are "tapped out".  Same for corporations... that was what happened in 2008, more or less.  The story was made to seem complicated, but it wasn't really.  2008 was when private credit peaked.  Government has been trying to back fill ever since.  

I doubt that the average congressman understands this, but the leadership of the parties who are beholden to the same interests do.  And they work together to keep the illusion going.  It's all manufactured.  Obama isn't sinking the country... it's already sunk.  It's the titanic.  There's no fixing it, it'll just take a bit of time before it goes down.

odatruf's picture

Up arrow because I agree that the left / right benefits those in power and that the path we are one is slow and hard to change, and Obama isn't the only one still pulling ores in the wrong direction.

But I do disagree that the system can't pay both principle and interest. It can. All that is needed is courage, leadership and the selflessness to recognize that such a vote/action may mean you are out of work come the next election cycle.



kridkrid's picture

No... the system can't pay both principle and interest... the interest doesn't exist in the form of "money".  This isn't a theoretical or academic discussion and this doesn't have anything to do with rah-rah appeals to "courage and leadership".  This is merely a description of how our system works.  Money is loaned into existence with interest attached.  However, that "interest" does not have a corresponding "dollar" connected to it.  So more debt must be loaned into existence... always.  There is no getting around this... this is how it works.  

swmnguy's picture

It's just about the math.  Any 7th grader can figure it out.  Both of my kids did, in 7th grade.  When given a simple problem regarding revolving debt at compound interest, eventually they both said, "If you don't stop using the card, you'll get to the point where it will be absolutely impossible to pay it off, ever, no matter how much money you can get!" < light bulb on >

kridkrid's picture

7th graders are smarter than adults. They still have some intellectual curiousity and they don't have the same normalcy bias built in.  Your post below is perfect.  That's what we are... we are consumers... leveraged consumers.  It's a more sophisticated form of serfdom, but it is serfdom.

swmnguy's picture

"7th graders are smarter than adults."  Word.

Or at least, they're less dumber than adults in many ways.

swmnguy's picture

"Serfdom."  Precisely.  That's why I can't call Obama a Socialist, nor a Fascist, nor call anybody a Conservative or a Liberal or any of the terms people like to toss around as if they meant something anymore in this context.

They're all Neo-Feudalists.  Or skip the Neo; they're just Feudalists.  We don't have the whole religious construct so prominently in our minds any more, so the Great Chain of Being isn't the same as it was in, say, 1200 CE.  The basic concept is the same, though.

They had politics in the Middle Ages, too.  Various contenders and pretenders for various thrones.  They all positioned themselves to be very different from each other.  Some of them were nicer to the serfs than others.  But there was no question of a serf sitting in the throne.  When the serfs got feisty, all the nobility forgot their differences until they were done killiing uppity serfs.

We can all watch Democrats and Republicans, and talk about Conservatives and Liberals, and who knows, even Statists or Socialists or whatever.  It can be diverting theatre, though I prefer baseball myself.  I guess if I'm going to be enslaved, I'd prefer a master who is kindly toward me.  But I'm funny; I'd rather not be enslaved.  Go figure.

odatruf's picture

Much of it is theater, I agree. Because at the end of the day, the audience, in aggregate, has more power than they know or know how to use.  That's why TPTB keep us hooked, happy and divided (contradictions notwithstanding).

@kridkrid: I understand what you are saying in your first reply about the actual dollars not 'existing' for the debt that is presupposed from the outset. As you know, in our fractional system that isn't the problem as it would be in another format. There are plenty of complaints about the way things are that ring true (at least to me), but your point isn't one of them. We can pay both interest and principle and doing so will crowd out other spending, but the outstanding debt will go down. And if you do it long enough, it can go to zero.



kridkrid's picture

"As you know, in our fractional system that isn't the problem as it would be in another format" - Ummmm, what?  Time for you to go on a journey.  Be open minded, like a 7th grader.  Your reward will be some level of understanding.  Or don't.  I don't really care.

odatruf's picture

I am open to considering other views. Please point me in a credible direction and I'll give it a look.

My point is that our system does not preclude borrowing and then the repayment of that borrowing. There are consequences and crowding out via the interest above the principle, but that value decision can be rational.



kraschenbern's picture

...Until such time as title to (most) real assets are in the hands of the banks. 

Fixed it for you.

Panafrican Funktron Robot's picture

"But I do disagree that the system can't pay both principle and interest."

The GDP is 15.5 trillion.  The debt is 16.4 trillion.  That's a $900 billion dollar gap that's widening daily.  Current spending is at 3.5 trillion.  Current revenue is at 2.4 trillion, for an annual deficit of 1.1 trillion.  So, we would need a combination of spending cuts and revenue increases that would result in 1.1 trillion + 900 billion = 2 trillion dollars.  This year.  Does that sound even remotely possible to you?

odatruf's picture

Is it remotely possible? Yes. Is it likely? No. But that it won't happen is not the same thing as saying the system precludes it.

As you may recall, the feds ran an on budget surplus for a few years in the late 1990s. At that point, we paid down some principle by not rolling the full value of expiring bonds into new bonds. Yes that budget surplus was in many ways gimmickry and also fueled by a dot com bubble that was unsustainable. But, the system itself is able to allow the total value of outstanding bonds to down. <-- this is a very simple review of what happened then, but I can expand on it if you'd like.

What makes it impossible isn't the system, but rather those who benefit from it.




nonclaim's picture

Obama is the face of "hope & change" and for all intents and purposes he is the leader of the free (falling) world. So no, not a distraction even if it is an illusion. Debt and interest in its current format (fiat) are also an illusion... but, unlike you, I would not call it a distraction.

But, paradoxically enough, calling it all an illusion is a distraction for all the common people see and feel is the illusion.

swmnguy's picture

Exactly, KK.  Once money is debt and debt is money, and both can be bought and sold like commodities, with leverage, it's all over.  Because it CAN get out of hand, it WILL get out of hand.

As I argued on a thread last night, each human being can earn and spend and invest a certain amount of money.  However, that same individual can be used to create a vastly higher amount of debt.  Since debt is money in our system, the elites would rather the individual be saddled with $750,000 in debt than have a positive or zero-balance net worth, with income around $100,000 (Yes, I'm talking about myself).  I am of nearly no use to the elites in charge of the monetary system, though I am the very picture of what used to be considered modest middle-class success in progress.  To this system, the guy down the street who makes $45,000, but owes $275,000 on his house, $40,000 on a huge SUV, $150,000 in student loans, and carries about $30,000 on credit cards (Yes, I'm describing a guy I know) is vastly more valuable to the system.  Doesn't matter if he ever pays all of that $495,000 either; his creditors got all the money they lent him for essentially free, and they've already sold off all the debt and gotten their money back.  Sure, if he defaults eventually the bond market and shadow markets will collapse, but that's why they're getting $85 billion a month from the FED for MBS's alone.

Our system requires infinite markets, resources, and money.  The first two aren't infinite.  Money can be made to be infinite, as long as it's abstract, and as long as it's balanced by debt so it zeros out.  In that instance, the debt is far more valuable to the system than what we consider to be "money," though the system considers them the same thing.  Consumers and money have the same relationship as sheep do to fleece.  They need it, but it's a lot more valuable to those who do the shearing, and at a certain point, if the fleece isn't enough for them, they'll actually skin the sheep.  Tough luck for the sheep.

RebelDevil's picture

And then I ask myself, "Where is all of the county's wealth ending up if it's going to pay off this fradulent debt?"
*Cue anti-Rothschild anger*

swmnguy's picture

Well, that's kind of the Achilles' Heel of this whole thing.  Since it's all abstract, it really isn't going anywhere.  it only has value if we think it does.  As soon as we don't think it does, then it doesn't.  Preserving that "misplaced concreteness" is the whole point of dog-and-pony shows like "The Fiscal Cliff" and "The Debt Ceiling" and all the other installments of WrestleMania.   The second people stop believing in it, then it all comes down to brute force.  The Rothschild types are counting on their thugs' believing in it just a little bit longer than everyone else does.

odatruf's picture

I don't understand why assert that you are less valuable with $750k in debt being serviced by 100k in income than someone with 495k in debt serviced by 45k in income.  Is it the ratio?  I'd think that the gap in the raw number would make you a more attractive mark. Please explain if you have the time.


IrritableBowels's picture

Because he's not an origin for free money generation.  You need to find a bigger rabbit hole.

Johnny Utah's picture

You said "$85 billion in MBS a month". It is $40 billion a month in MBS(unsterilized), the other $45 billion is a continuation of op.twist, which will be unsterilized as well but that will go to purchase the long bond, not MBS. Don't get me wrong, the debt situation is untenable and will not be fixed by the politicians. I use to think ZHers were doomers but I have come to realize that we are going the way of Greece no matter what. Only a dictator could save us and who wants that.

odatruf's picture

So long as the dictator likes everything I like, what could go wrong?

- says everyman

aerojet's picture

A very succint description of what has taken place.  The only thing I would add is that government debt is not the same quality as private debt--it is a poor replacement that will lead to many problems and a much faster unwind because it misallocates resources far worse than private debt.  We should have taken our medicine.  The collapse they are setting us up for could wipe out the human race.  I have no understanding of the timeline of these events, however.  I thought we would already be seeing massive problems, but the masters of the debt have managed to kick that can much, much further than I ever expected.  But you can see the massive cracks forming.  I do know that in the US we'll have plenty of warning, because Europe burns first, no matter what.

swmnguy's picture

Timing is indeed the bitch, isn't it.  I didn't figure any of this stuff out until I refinanced my house in 2003  I just had to know why banks were willing to lend me $135,000 for a house I had bought in 1996 for $49,500.  When I said, no, I only want to lock in a rate and pay off one nagging entanglement, so all I want is $60,000, they laughed at me for being so stupid.  When I closed the deal for $60,000, at a slightly lower interest rate, my monthly payment actually went down, despite having added some 20% to the principal.  I had to spend a whole day with a legal pad, several pencils, a calculator and a jug of iced tea to figure out how that worked.  That process led me to suspect something awful was going on.  Since then I've been reading everything I can get my hands on, and as we all know, something awful is going on.

But I thought  TS would HTF a long time ago.  2007, I thought at first.  I thought 2008 was "The Big One."  I wildly underestimated the reservoirs of wealth to be made abstract and multiplied by leverage and exploited, as well as people's capacity to keep doing what they've been doing for no particular reason.  And the outright mendacity of people who think things are going their way, and the unwillingness of most people to understand the tools and processes on which they depend.  So the road down which to kick the can is a heck of a lot longer than I ever suspected. 

Maybe I just have a much lower tolerance for such things than most people.  Most of my former employers would endorse that notion, which is why I'm self-employed.

odatruf's picture

swmnguy - and the biggest outright mendacities are the ones aimed inward.

Seize Mars's picture

Dr. Sandi

Yes, central banking with a state-controlled fiat currency is a main plank in the "Manifesto."

Here is a site that shows this:

There are many other places on the web to see this.


Dr. Sandi's picture

Unfortunately, banking controls the state. Not quite the same model as Marx.

GOSPLAN HERO's picture

It's a very thin line between communism and fascism.

HardAssets's picture

GOSPLAN - someone down arrowed you. Likely because they don't have a clue what 'communism' and 'fascism' are - - or anything about their origins.

But what do you expect from those indoctrinated in commie fascist public 'schools' ?

Shizzmoney's picture

But what do you expect from those indoctrinated in commie fascist public 'schools' ?

Totally different like the Catholic Private School I went to, that espoused about some "Jesus" guy who preached about "forgiveness", "sharing", "sacrifice", and a guy who only got angry when the Pharisees and the Money Changers practiced "usury" in the Temple?

The schools aren't the problem.  The government, and its corporate backers who fund them, ARE.

HardAssets's picture

Another public school 'teacher' ?

First of all you use the logical fallacy of a Straw Man argument - what is taught in Catholic schools about Jesus has little to do what went on in the public 'schools' over the last 100 years.

Do a little research. Start with NY state and NYC Teacher of the Year John Taylor Gatto. Also research Charlotte Iserbyt who was a high level official in the US Dept of Education. You'll find the origins and purposes of the 'education' system.

Dr. No's picture

They will only downgrade if the carrot is big enough.  They are all part of the crew on the Titanic.  The iceberg has been hit.  Nothing will stop the water, but need to keep the passengers calm as long as they can.  Not because it will help, but uniformed passengers are easier to deal with than ones who know the ship is going down.

Dr Benway's picture

I often think about that angle too. And about this hypothetical scenario:

If the gov discovered a meteorite hurtling toward earth that would guaranteed kill everyone a year from now, with no chance of stopping it, would they tell the people or would they try to keep it quiet?

Dr. No's picture

A meteor is would be doom for everyone, but he default of the fedov will be liberating for most.  The feds dont want us to know they have no clothes since they are the ones who stand to loose the biggest.

pods's picture

Calm as Hindu cows.


HardAssets's picture

Does anybody pay attention to the 'ratings agencies' ?

 Just another branch of the American Pravda.


odatruf's picture

Exactly.  Remind me again of the negative borrowing consequences of the last downgrade?

As if there were a real market pricing this stuff in. Ha ha ha.



Panafrican Funktron Robot's picture

Solid point, we pay for it dearly via dollar devaluation, but that shit is behind the curtain.  Headline rates and short term glee are all "leadership" gives a fuck about anymore.  

Landotfree's picture

To me it's not a credit rating issue, it's credit worthiness issue.   The structure that is in place, the US has no problem supplying the interest needed plus principle where required.... well, at least until whole system collapses.