Saturday, March 20, 2010
Moody's Warns U.S. Sinking into Financial Abyss
“A national debt, if it is not excessive, will be to us a national blessing.” —Alexander Hamilton.
Not even Alexander Hamilton would support today’s national debt. When the nation’s system of perpetual, permanent debt was enacted, it provided, according to American Public University’s History Central, “that the debt be funded by reissuing bonds to be paid back in full after 15 or 20 years. Thus, rather than eliminating the debt, Hamilton's plan created a large, permanent public debt, issuing new bonds as old ones were paid off. Congress approved this proposal.”
More or less, that’s the system that still exists today. Paying off the principal on the national debt is done almost entirely by the issuance of new Treasury bonds. And, per Hamilton, “if it is not excessive,” can be indispensable — in times of war, for example.
For now, the nation is able to sell new bonds to pay off the old. Since the national debt has grown every single year since 1958, however, that means annually, for more than 50 years, more bonds have been sold than have been paid back. This has thus resulted in a net increase of the debt every year, even when Congress supposedly “balanced” the budgets in 1969 in and in 1998.
Interest servicing the debt, on the other hand, comes out of revenue. This is where it gets interesting — and downright scary. The U.S. is about to max out its credit card while barely keeping up with its minimum payments servicing the nation’s gargantuan $12.4 trillion mountain of debt. Yesterday, Moody’s Investors Service again warned the U.S. that it is “substantially” closer to having its credit downgraded.
As reported by Fortune’s Chris Barr, “interest payments on general government debt -- combining the federal government with the states -- could rise above 10% of revenue by 2013... That's the level at which the rating agency typically considers a downgrade. Moody's said debt affordability is the key factor to consider in ratings decisions, because debt costs are apt to constrain policymakers…”
This is a critical point. Why? As reported by Bloomberg’s Matthew Brown, “Financing costs above 10 percent put countries outside of the AAA category into a so-called debt reversibility band, the size of which depends on the ability and willingness of nations to reduce their debt burden by raising taxes or reducing spending. The U.S. has a 4 percentage-point band…”
That does not leave that much wiggle room — at all. Barack Obama and Congress are pushing the maximum limits of the full faith and credit of the nation, violating Hamilton’s admonition of an excessive national debt burden. By 2013, according to the White House, the debt will top 100 percent of the Gross Domestic Product.
Just how bad is this scenario? Per Brown, just 0.5 percent less economic growth, higher-than-expected interest rates, and “less fiscal adjustment” each year below Moody’s projected baseline assumptions would result in the U.S. “paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said.”
Making matters even worse, the Congressional Budget Office (CBO) estimates that interest as a percent of revenue will top 14.8 percent as soon as 2015. That year, $520 billion interest will be owed with a projected $3.504 trillion in revenue, according to the CBO. By 2020, that number rises to 20.7 percent: $916 billion owed with projected revenue equally $4.417.
For our uninitiated readers, that’s bad. Really, really bad. Within five short years, the nation will rocket past the 14 percent interest-owed-to-revenue credit limit imposed by Moody’s. And that’s assuming that U.S. treasuries sell splendidly. That there is no run on the dollar.
But, by the government’s own data and Moody’s stated warning, a debt downgrade now appears all but certain. This is an emergency, but it is not being treated as such. Treasury Secretary Timothy Geithner promised to the American people that this would not happen. He said a debt downgrade “will never happen to this country.” Really? Was that an accurate assessment of the increasing risk of sovereign debt default in the U.S.? Surely he must have known what the criteria for keeping the nation’s Triple-A credit rating was. If he didn’t, he should be fired. If he did know, he lied, and should be subpoenaed. And fired.
All this time, the nation has been sold a bill of goods that deficit-spending and monetary easing were absolutely necessary to “save” the economy. But now that Congress, the Treasury, and the Federal Reserve have done so, the risk of sovereign default looms ever-closer. What has been gained exactly?
A debt downgrade would almost certainly mean higher interest rates, higher tax rates, and an overall weaker economy. In turn, there would be less jobs and, since the nation depends on both individual and corporate income taxes, that will mean less revenue. All of which will further deteriorate the American people’s ability to keep up with servicing the debt.
In other words, the slightest economic hiccup — in commercial real estate, basic housing, education, energy, or elsewhere — could result in the nation’s finances being devastated almost immediately. Even worse, if the Obama budgets are enacted as proposed, within five years, the nation’s finances will be devastated, per the CBO’s data and Moody's warning.
Think the CBO is exaggerating? By the White House’s own projections, the percentage of interest-owed-to-debt will top 14.7 percent, not in 2015, as the CBO projects. But in 2014, a full year sooner. That year, according to the Office of Management and Budget, interest owed will total $510 billion versus $3.455 trillion.
Juxtapose Moody’s warning yesterday with reports that the Social Security Administration (SSA) has now begun cashing in its $2.5 trillion in treasuries. As reported by the AP’s Stephen Ohlemacher, “For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year. Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.” Making matters worse, as Social Security cashes in its treasuries, the only way for the government to pay for them will be to… issue more treasuries! That would mean that another $2.5 trillion would be piled atop the national debt.
These IOU’s have been piling up for years, and now that the Social Security is finally in the red, the SSA is cashing them in to keep the payments moving. However, by 2037, if not sooner, it is projected that the Social Security will run out of those IOU’s. It will be completely bankrupt.
For now, the nation is able to pay off the principal owed on the debt through the sale of more treasuries. But because that debt is now so excessive, government entitlement programs are now in the red, and credit rating agencies are already firing warning shots across the nation’s bow, it is now much riskier. Markets will now begin demanding higher yields on that debt.
Hamilton may have supported the creation of a perpetual debt, but nowhere did he ever propose, as a matter of policy, that the nation contract debt far beyond the nation’s ability to pay for it. This is beyond excessive. This is suicidal. That sinking sound you hear is the Ship of State being fully plunged into the bottomless Abyss.
The Human Costs of Big Government
President Obama recently informed a crowd of young people — to thunderous applause — that under his health care plan, they could stay on their parents’ coverage till age 26. Voters 18-21, of course, went for Obama by a 2-1 margin, but given that he is a ‘post-partisan’ president, we can’t chalk that up to politics, now can we?
Obama-care proponents contend that his proposal is only an option and not a mandate (though a handful of states have enacted mandates). But then so are junk food and cigarettes, and no one hesitates to address their dangers. Under our Constitution, whether or not parents choose to provide coverage for their grown children is not the concern of President Obama. As columnist Mark Steyn has noted, however, the details of Obama-care pale in importance next to the overall concept of nationalizing yet more of our private lives. Forget the minutiae for a moment and consider our culture.
Public debate almost always concerns the practicalities and economics of Nanny-state activism. Seldom considered is that the human toll of engendering dependency can be measured in fatherless households, lack of initiative and prolonged adolescence.
Numerous sociological factors can probably explain why fifty years ago a 26 year-old was an adult, long independent, with a stable job and an intact family, whereas today, 26 is practically late childhood. Still, policies that keep young people dependent on their parents (via the government) do not instill self-discipline or allow the confidence and self-satisfaction derived from taking care of yourself for the first time. The Great Society and the welfare-state must bear some of the blame. Diana West, in The Death of the Grown-up (2007) details how Italy’s highest court ordered the estranged father of a thirty year-old to pay his son roughly $1000 a month until he found a job that “fit his aspirations.” The son had a law degree, but the court ruled that a parent’s duty of maintenance did not end with adulthood. According to West, to no great surprise, more than a third of Italians over thirty still live at home with their parents. Still, such an outrage could never happen here.
Or could it? The drip-drip accumulation of big-government policies nullifies our better natures. And political correctness and radical feminism have wussified many American males. Teenage girls in Seattle recently beat one of their own senseless while a group of security guards watched. Where was law enforcement, everyone asked, when the pertinent question was where were the MEN? Iowa, responding to public outrage, recently passed legislation to keep underage girls from performing in strip clubs, reversing a controversial court decision (which deemed stripping an ‘art’). Why, in 2010, was this even an issue? Men used to protect the safety and chastity not only of their own daughters but of all girls. Today, young women depend on the fickle nature of court rulings, not as a last line line of defense, but often as their only option.
Each tier of Nanny-state activism is easier to write off than the one before it. Patriots tend to save their big guns (figuratively speaking, of course) for the most outrageous abuses of federal encroachment. By then, we have accepted most of their premises and are just arguing the practicalities. In public debate, compassion and emotion tend to trump reason and tough love, but if the left wants to advance their agenda on grounds of compassion, perhaps they can show us their humanitarian reasons for Euro-fying American and denying citizens their sense of freedom and self-sufficiency. The hard facts of Obama-care are public record, but only by speaking to the unlimited potentials of our citizens will they really grasp what is on the line.
Will the jobs bill create any jobs?: "On Wednesday, the Senate passed a $17.6 billion spending bill. It needs only President Obama’s signature to become law. The hope is that the new spending will create jobs. But hope is not the same as reality. Remember: anything that Washington giveth, it must first taketh away from somewhere else. This jobs bill is a zero-sum game. All those new jobs that politicians will be showing off for the cameras will have come at the expense of other jobs elsewhere. On net, they’re not creating a thing.”
Get ready for increased taxes: "I’ve noted any number of times that government taxes comprise 14% of the national income and government spending is at 25% of the national income. That’s as high as its been since WWII I believe. The point, of course is there are three obvious choices here — cut spending to the income level (and beyond, really, if you plan on paying off debt) or increase taxes to the spending level (and beyond, again, if you plan on paying off the debt) or a combination of both. Watching this current administration, it appears option two is in the works. Lots of lip service about ‘unsustainable’ spending, etc., but the only movement I’ve seen is legislation that increases that. And, also, plans to increase taxes.”
WA: Walgreens says no more new Medicaid patients: "Effective April 16, Walgreens drugstores across the state won’t take any new Medicaid patients, saying that filling their prescriptions is a money-losing proposition — the latest development in an ongoing dispute over Medicaid reimbursement. The company, which operates 121 stores in the state, will continue filling Medicaid prescriptions for current patients. In a news release, Walgreens said its decision to not take new Medicaid patients stemmed from a ‘continued reduction in reimbursement’ under the state’s Medicaid program, which reimburses it at less than the break-even point for 95 percent of brand-name medications dispensed to Medicaid patents.”
Israeli aircraft strike Gaza: "Israeli aircraft attacked at least six targets in the Gaza Strip early today, the day after a rocket fired from the Palestinian enclave killed a Thai worker in Israel as Baroness Ashton of Upholland, the EU’s deputy foreign policy chief, was visiting the blockaded territory. Two civilians were wounded in one of three attacks on smuggling tunnels along the border with Egypt. The other targets included two open areas in Khan Younis and a metal foundry near Gaza City. An Israeli military spokesman confirmed six sites had been targeted, including two tunnels dug near the Israeli border fence and a weapons manufacturing site, and added "direct hits were identified." The rocket attack, from a radical Palestinian group with suspected ties to al-Qaeda, was the third in 24 hours, but the first deadly attack from Gaza at Israel in more than a year."
Scott Brown effect: Is Boxer’s seat next?: "The dramatic shift in poll numbers in the California Senate race — a surge for former US Rep. Tom Campbell for the GOP nomination and a double-digit drop for Senator Barbara Boxer (D) since January — has serious national implications, according to political analysts. A California Field Poll released Thursday shows Mr. Campbell running ahead of businesswoman Carly Fiorina by six points and Assemblyman Chuck DeVore by 19 points among likely GOP primary election voters. Perhaps more important, say analysts, is that more voters now have an unfavorable than favorable view of the incumbent Ms. Boxer, and she is essentially tied when matched against Campbell (44 to 43 percent) or Ms. Fiorina (44 to 45 percent). Poll director Mark DiCamillo told the Sacramento Bee that ‘the tenor of political discourse’ has clearly changed in California since Republican Scott Brown registered an upset victory in the Massachusetts Senate race in January. Others agree.”
Warships blasting Somali pirates out of water: "An international fleet of warships is attacking and destroying Somali pirate vessels closer to the shores of East Africa and the new strategy, combined with more aggressive confrontations further out to sea, has dealt the brigands a setback, officials and experts said Thursday. The new tactics by the European Union naval force comes after Spain— which currently holds the EU’s rotating presidency, and whose fishing vessels are frequent pirate targets — encouraged more aggressive pursuit of pirates and the coalition obtained more aircraft and other military assets, said Rear Adm. Peter Hudson, the force commander.”
Chaffetz wants to “ferret out” federal workers with unpaid taxes: "Working for Uncle Sam comes with some great perks, like job stability, posh benefits packages, and in many cases, average salaries that are higher than what the same job pays in the private sector. That’s why Republican Rep. Jason Chaffetz, R-Utah, is irked that nearly 100,000 civilian federal employees owe the IRS $962 million in back taxes. He thinks they should pay up or be fired.”
IKEA, Sweden & the inheritance tax: Lessons for the US: "America sits at the same economic crossroads today that Sweden faced five years ago. Sweden’s experience in eliminating the death tax could help the United States save businesses and add jobs at a critical time. Once known as Europe’s socialist paradise, Sweden still has one of the world’s highest top income tax rates (57 percent). But like the US, it no longer has an inheritance tax, or what Americans commonly refer to as the estate or ‘death’ tax. The Swedish Parliament abolished its inheritance tax in late 2004. … The country’s entrepreneurs were moving offshore — and taking their companies with them. The death tax was only making a bad situation worse.”
Corruption on the British Left: "The union behind the British Airways strike has received £18million from taxpayers under Labour, The Daily Telegraph can disclose. Unite, and the two unions that formed it, received the public money under two little-known funds to improve management and training for its members. It has been the biggest beneficiary of one of the schemes, the Union Modernisation Fund, and received a sixth of all the money given out under the Union Learning Fund. The figures have led to fresh claims that Britain’s biggest union has taken over the Labour Party after donating almost £30million over the past decade and employing a key adviser to Gordon Brown as its political director. It comes ahead of a planned three-day walkout by Unite members of BA’s cabin crew this weekend, which is set to cause travel chaos for thousands of passengers. Francis Maude, the Shadow Cabinet Office Minister, said: “This really looks like money laundering - taxpayers' money is being funnelled into Unite then put straight back into Labour's coffers. “It's a real racket, with taxpayers' money being round-tripped into Gordon Brown's re-election fund. We must have much greater transparency on what unions are receiving from the Labour Government in return for their backhanders.”
My Twitter.com identity: jonjayray. My Facebook page is also accessible as jonjayray (In full: http://www.facebook.com/jonjayray). For more blog postings from me, see TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCH, POLITICAL CORRECTNESS WATCH, GUN WATCH, SOCIALIZED MEDICINE, FOOD & HEALTH SKEPTIC, AUSTRALIAN POLITICS, IMMIGRATION WATCH INTERNATIONAL, EYE ON BRITAIN and Paralipomena
List of backup or "mirror" sites here or here -- for readers in China or for everyone when blogspot is "down" or failing to update. Email me here (Hotmail address). My Home Pages are here (Academic) or here (Pictorial) or here (Personal)
The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)
Posted by JR at 12:51 AM