Open thread August 4, 2011 Dan Crawford | August 4, 2011 7:12 am Tags: open thread Comments (79) | Digg Facebook Twitter |
The NYT has this article asking where all the fat cats have gone: http://www.nytimes.com/2011/08/04/us/politics/04donate.html?_r=2&hp
Meanwhile W’s likeliest GOP protege Rick Perry asks the question: What if a sanctimonious asshole held a football stadium sized prayer meeting and nobody came? http://www.politicususa.com/en/rick-perry-response-bomb
If Sam Brownback is your claim to political relevance you are eating some thin gruel.
The whining about $350B in war cuts……………..
The CBO estimate has the pentagon/K St/Hill cabal getting $7800B in the next 10 years.
If the “10 year pillaging the US” war plans were cut by $3000B, forces rationalized and empire less secured the US military industrial congress cabal would remain larger in terms of real dollars (though with less stuff, and no enemies) than during the mid to late 1970’s, and 2000, under Carter and Clinton.
The issue is the colonels/generals’ retirement career plans get more sympathy than the victims of the plundering of medicaid and medicare would get.
GI Joe wants to cut social security first:
Sen. Lieberman: Cut Social Security to prevent cuts to defense budget – Sen. Joe Lieberman (I-CT) announced on the Senate floor Tuesday that he was working on a bipartisan proposal to reform Social Security. He said reforming entitlement programs like Social Security was necessary to prevent cuts to the defense budget. “Bottom line, we can’t protect these entitlements and also have the national defense we need to protect us in a dangerous world, while we’re at war with Islamist extremists who attacked us on 9/11 and will be for a long time to come,” he said
SS has cashed both the war profiteers and tax cuts for ten years now. They want long war they can raise taxes and convert privately held T Bills to war bonds payable on demobilization.
Cut the F-35, it has NOTHING to do with warring on terrism.
“Six senators, let by Texas Republicans John Cornyn and Kay Bailey Hutchison, wrote to Carter on Aug. 1” Aviation Week on line.
I have been in weapons’ acqusition for over 25 years, doing reliability and logistics and I have done those estimates the senators say are too high.
Th designers and manufacturers’ shoddy work make our sustainment estimates too low and these quality problems mean at a trillion bucks ($80B per year) the airplane will be broke too much of the time.
Worse falsely saving money by only having one engine design makes it impossible to fix engine reliability issues without paying huge fees for P&W to do it right.
Cut the F-35, and a few other excessively spec’ed systems, their bow wave will go a long way to cutting DoD down to size relative to the debt ceiling “agreement”.
REPORT: Debt Ceiling Deal Will Cost 1.8 Million Jobs In 2012 – The Economic Policy Institute, a top nonpartisan think tank, estimates that the deal struck this weekend to raise the nation’s debt limit will end up costing the economy 1.8 million jobs by 2012. But while the unemployment rate remains above 9 percent, the deal does nothing to address chronic joblessness. The agreement would reduce spending by at least $1 trillion over 10 years, but even the near-term cuts could shrink already sluggish GDP growth by 0.3% in 2012. According to EPI, the plan “not only erodes funding for public investments and safety-net spending, but also misses an important opportunity to address the lack of jobs.” In particular, the immediate spending cuts and the “failure to continue two key supports to the economy (the payroll tax holiday and emergency unemployment benefits for the long term unemployed) could lead to roughly 1.8 million fewer jobs in 2012.”
CT Independent Lieberman (United Technologies, Sikorski/Pratt & Whitney), Texas Republicans John Cornyn and Kay Bailey Hutchison (both Lockheed Martin, et al) are not bi-partisan they are of the military industry congress complex.
They ought to go after the $100B a year in demands on the deficit paying retired military personnel and DoD civilian retirees.
Debt deal scam, it doesn’t do anything for the too big too fails which are still not able to mark their assets to market.
Or that DoD will burn through $7.8T and cannot pass a financial audit because the money goes down fraud waste and abuse (rat holes) like the F-35, and contracts in war zones.
54.5 is official.
President Obama announced the new Corporate Average Fuel Economy Standards last Friday that mandate cars and light trucks average 54.5 mpg by 2025.
Why the Obama Administration decided to release this news on Friday, a dead news day, is left to speculation. Perhaps it is because many automotive engineers had already explained their vehicle weight reduction safety concerns and vehicle material cost concerns in meeting this mandate on top of the 2016 mandate. Perhaps it is because the American Road and Transportation Builders Association (ARTBA) had explained that shifting to the new CAFE standards would result in a projected loss of $75 billion in highway tax revenue by 2025. Whatever the reasons, the Administration buried this news story hard and fast, almost without a public whimper on the costs associated with the change.
Can the automobile manufacturers achieve a fuel economy fleet average of 54.5 miles per gallon by 2025? And at what cost, whether internal or to consumers who will buy the new vehicles?
What happens when the federal highway trust fund (HTF) takes a $75 billion hit? It was already understood that the 2016 CAFE standards was expected to cause a $9 billion loss the the HTF. Implementation of the 2025 CAFE standards push that total HTF hit up another $65-66 billion according to Harvard’s William Buechner, ARTBA vice president of economics & research.
Will the two year delayed federal highway and transit program reauthorization bill identify new HTF funding options necessary to offset the President’s new CAFE standards for 2025?
The President’s announcement should leave many Americans wondering if the Administration is evaluating the potentially adverse effects of its actions before it makes public announcements about major economic changes.
It is likely that the Administration intends to seek additional fuel tax revenues but lacked the integrity to raise the issue during the Friday briefing. Americans can expect a sizable increase in federal fuel taxes both by 2016 and 2025. Add that annual out of pocket cost to rising prices of new automobiles which should be soaring by 2025. Consumers are in for a huge shock. The little Fiat 500 piece of junk that Chrysler is betting on may look like a normal medium sized vehicle by 2025.
I wonder if the econ blogs even noticed.
And the Left keeps going on and on about how this President is not a Liberal?
Anyway….in the long run what is this going to do to the economy? I suspect it will not be good! Small business is in big trouble.
Can you imagine the cost that is going to be involved for those that have to drive large Trucks as part of thier Business? [i.e. Construction, Delivery, Transport]
Yeah, we’re headed for higher costs. No doubt. It doesn’t look good.
It going to be interesting to see how the transport firms and others using larger delivery vehicles handle the changes going forward. Their operating costs will jump.
The bigger trucks are going to be surrounded by tiny little expensive cars on the highways in the next decade. I wonder how that will play out.
A pence or two for the externalities.
The Big 3 and the UAW caved on this and had a hand holding moment with Obama, but I suspect that they suspect something different will happen in 2013 anyway.
I belive large trucks are exempt from this particular standard, subject to a different one.
Large trucks may even be easier, due to the availability of propane and natural gas conversion.
Is anyone watching the stock markets? Europe appears to be imploding due to its EU financial mess. And the U.S. markets are being hammered.
Class 8 trucks and other trucks will not be exempt from the forthcoming increases in fuel taxes. And the large trucks, Class 8 and others, are already operating with higher emission restrictions on diesel engines, all of which reduced their fuel economy.
We’re not going to operate open highway Class 8 semi trucks on propane and natural gas anytime in the near future. Bus fleets and local delivery, sure. But not the major haulers in my opinion.
where all the fat cats have gone???
Obama Still Wall Street’s Honey … Raises More (As Both Raw Amount And Percentage) From Wall Street Than In 2008 – Money News notes:A just-released study by the Center for Responsive Politics shows that President Obama is relying more on Wall Street to fund his re-election this year than he did in 2008, according to CNBC, which obtained an advance copy of the report. ***Obama has even added new Wall Streeters who did not work for him in 2008, including former Goldman Sachs CEO Jon Corzine, Evercore Partners executive Charles Myers, Greenstreet Real Estate Partners CEO Steven Green, and Azita Raji, a former investment banker for JPMorgan. Obama and the DNC combined are on pace to far exceed the amounts Obama raised from Wall Street donors in 2008, both in raw dollar amounts and as a percentage of what he raises overall. Mr. Obama is bought and paid for. He wasn’t “bullied” into accepting a bad debt deal … Republicans weren’t even calling for much of what he caved in on. In truth and fact, Obama has fought to sell out the American people from day one.
I drove a car that got 50 miles per gallon in 1959. it could also beat your car on a tight track.
the auto industry has always said “it can’t”, but years of European and Japanese engineering show that it can.
it wasn’t a Fiat.
Yet look at the dimensions of cars. I was looking at Chevys, and compared the internal dimensions of a Cruze, a Malabu, and and Impala. They are all the same except that the shoulder room on an impala is 4 in bigger than a cruze and the hip room is 3. Note that this does mean that the 6 passenger car is a dodo. I first noticed this a couple of years ago when I drove a versa and it had a good bit of room (I am 6′ 4″ tall). If you look a lot of the compacts are now midsize in interior room.
The CAFE has unleashed the engineers to try ideas that managment with its stay the course ideas had rejected. (6 or 8 speed transmissions, the auto shift manual, start stop engines, made possible by fuel injection, electric power steering and soon ac, etc). It is proof that if you give engineers a challenge they can rise to it. There was a video on the web crashing a 59 chevy into a 2009 chevy, http://www.youtube.com/watch?v=joMK1WZjP7g
(Malibu vs Bel Air). The difference is night and day. AS one commentor on you tube put it would you rather pay 20k for a new car or 200k for medical bills? Of course if you want really safe we do know how to do it, look at formula 1 cars that can crash at 200 mph and the driver likley walk away. Carbon fiber does the trick. If some bright person can figure out how to do the fiber by machine, then the cost will come down.
On a related topic recall carboratour icing? and cranking for a long time to start, versus fuel injection and not even touching the gas pedal to start the car?
Let me add another metric in the 1950s and 1960s you got a 90 day warranty on the car. Today its at least 3 years witn 5 or more on the powertrain. clearly the companies feel the vehicles (at least at the new end) are more reliable.
Cable execs worried their customers are too broke to pay the exorbitant fees: http://www.reuters.com/article/2011/06/14/us-cableshow-idUSTRE75D6IA20110614
I’m bullish on rabbit ears. (courtesy Dr. Black)
Near a large metro area the local channels are pretty good, the antennae for digit is much better than for UHF.
And you can do splitters etc without much help from an EE.
I am fairly sure that MG won’t be able to drive his living room to work at 50mpg. I’m not too worried about crashing because I try to drive with my eyes open.
I’ll suggest once again that for driving in town a golf cart is all you need. Yet Detroit has spent millions coming up with an electric car that is as stupid as the “lets pretend” cars it has been selling since the 30’s.
It’s not clear that MG notices the difference between higher fuel economy and higher fuel taxes.
and while i have no idea
whether running big trucks on propane is a good idea, i’d be very much surprised to learn that they can’t. The Germans ran big trucks on wood.
busses and local delivery are a natural for electric. already have them in my little town.
and i’ll go out on a limb: i would suspect that emission restrictions don’t lead to reduced fuel economy unless the engineers are sulking. a more efficient engine is going to be cleaner, and vice versa.
I find it odd that some of the Angry Bear main posters have been talking about the debt ceiling deal, but none have provided links to the text of the legislation signed by the President nor CBO’s analysis of the bill.
This is a typical cart before the horse exercise.
I make no assumption that they have actually located or read the legislation.
If they have read the legislation and CBO’s analysis, it shouldn’t be difficult to post the links in a main post for the benefit of the Angry Bear readers who number in the thousands per day and week.
My wife wants to know where you think the livingroom is located in our Nissan Sentra. We know where it is in the Suburban which pulls the trailer that none of the tiny cars can begin to pull legally or physically.
But, hotshot, tell us about the livingroom in the Sentra.
Cluster of whimsy. Read the CBO report. The 10 year budget is fantasy. Check why “budgeters” use then year in their tables.
I should stop…………………….
Then read the constitution. Money appropriated for the war machine is for 2 or fewer years.
Or read a little about how Andrew Jackson dealt with Clay and Calhoun.
Nothing in that bill means any more than the words coming out of Boehner, Mc Connell, Reid and Pelosi’s mouths. Or Obama’s.
Meaningless tripe and the market know that and more and more non tea partiers are getting there.
And no one inside this beltway insane asylum is eloquent as Clay.
I’ve been wondering for awhile now when and how the default financial and bugetary prospects for the USG started being cited only on 10 year horizons. 5 representative terms and 1 2/3rds senate terms. When the actual yearly budget is usually a last minute continuing resolution enabled affair of lunatic brinkmanship. Yes I realize we return 90something percent incumbency to these bodies (a related but diferent problem) but maybe the bozos should focus on the year in front of them instead of this grandiose decade hand wave.
it’s in the Suburban.
I am not familiar with sentra’s, but i suspect they are bigger than golf carts, with better upholstery.
Here’s the deal, see, MG, gas is getting scarce (expensive). so is clean air. you are not going to be able to drive big cars, as fast, as far, as you (generic you) used to. see, it’s kind of a way of talking. not a personal insult.
no doubt you and sammy can squeeze a few more drops out of the old earth by drilling in your daughter’s bedroom, but after that…?
or maybe they’ll find a cheap way to haul all that methane from Jupiter’s moons… or find out that oil is really inorganic after all and the earth is really just a giant block of asphalt. but with any luck by then you will have discovered the pleasures of spending your money on something else.
Well for big trucks we start with using the railroads for trips of over 200 miles. In addition to vastly better mileage per ton shipped, you have vastly lower labor costs with 100s of drivers replaced by (now days) 1 engineer. Of course for now most railroads are vastly underutlized due to the lack of positive train control, with maybe 12 trains a day (main lines excepted). Apply some new thinking (which historically the railroads have been very poor at, that’s the way it has always been done is the stock answer) For fleet vehicles that return to the garage every evening CNG (compressed natural gas) makes sense since you have access to the fuel pump every day.
be of good cheer. those of us concerned about Social Security have to put up with 75 year horizons.
or “infinite” horizons. it makes the numbers scarier.
And we would no longer have an Air Force….but I keep forgeting your an isolationist. That ended in 1917 when Wilson (D) took us into WW I.
Islam will change
amateur socialist – “…maybe the bozos should focus on the year in front of them instead of this grandiose decade hand wave.”
Congressional concerns over the projected federal budget deficits can be summed up in the following two charts available from the U.S. Treasury. The reasons are quite obvious.
It sounds like you don’t get it.
I posted links to some of the negative economic effects here. I assume people can find the details of the deal at The Big Picture or on the poltical blogs–or just go through the Treasury’s Daily Summary, the way the rest of us do.
The US government is expecting bond rating agency Standard & Poor’s to issue a downgrade of its rating of US debt from AAA value, ABC News reported Friday. It is unclear whether a new rating would be graded at AA+ or AA.
A lot of investment portfolios and debt instruments have AAA- related covenants. With a downgrade they will have to divest, unless things are amended. This has the potential to create a lot of havoc as many buyers would be eliminated from the market at the same many are forced to sell.
Your condescension is duly noted.
U.S. Government’s credit rating is now AA-plus
Well, it happened. Friday, August 5, 2011.
AP – Friday evening – Credit rating agency Standard & Poor’s says it has downgraded the United States’ credit rating for the first time in the history of the ratings. The credit rating agency says that it is cutting the country’s top AAA rating by one notch to AA-plus. The credit agency said late Friday that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country’s debt situation.
This administration has been so wretched, its performance so incompetent, that we half-expect to see billboards popping up with the image of Jimmy Carter and the words, “Miss me yet?”
I assume that there will be a lot of amendments in the documents.
Amendments take time. They also take negotiation and concessions as you can’t make one party to a debt agreement who has a AAA guarantee just take a AA one instead.
S&P said “In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging” (bold added). I can’t disagree with that sentence. It’s not just the debt situation. The entire press release is here: http://blogs.wsj.com/marketbeat/2011/08/05/sp-downgrades-u-s-debt-rating-press-release/
None of which is consistent with S&P’s “pox on both houses” comments regarding the downgrade. From bloomberg:
“S&P also changed its assumption that the 2001 and 2003 tax cuts would expire by the end of 2012 “because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”
“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating,” S&P said.”
I doubt that you do get it based on some of your remarks. Complain, but where is there any evidence you understand the seriousness of the issues when you made statements that indicate quite the opposite.
they have big towns in south dakota?
or did you miss the “in town” part?
where is there any evidence the Congres understands the seriousness of the issue when they are cutting taxes and increasing defense spending while crying about the deficit?
I can’t wait to learn how President Bachmann’s plan to stiff bondholders works out.
United States of America Long-Term Rating Lowered To ‘AA+’
On Political Risks And Rising Debt Burden; Outlook Negative
Standard & Poor’s
S&P PRESS RELEASE – RATING SUMMARY:
United States of America Long-Term Rating Lowered To ‘AA+’
Due To Political Risks, Rising Debt Burden; Outlook Negative
Publication date: 05-Aug-2011 20:13:14 EST
S&P RATING REPORT:
United States of America Long-Term Rating Lowered To ‘AA+’
On Political Risks And Rising Debt Burden; Outlook Negative
Rating issued by Standard & Poor’s
August 5, 2011
Primary Credit Analyst:
Nikola G Swann, CFA, FRM, Toronto (1) 416-507-2582; email@example.com
John Chambers, CFA, New York (1) 212-438-7344; firstname.lastname@example.org
David T Beers, London (44) 20-7176-7101; email@example.com
I am going to post the full text of the rating report below.
· We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-termrating.
· We have also removed both the short- and long-term ratings from CreditWatch negative.
· 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.
· More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
· Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
· The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
On Aug. 5, 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’. The outlook on the long-term rating is negative. At the same time, Standard & Poor’s affirmed its ‘A-1+’ short-term rating on the U.S. In addition, Standard & Poor’s removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.
The transfer and convertibility (T&C) assessment of the U.S.–our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service–remains ‘AAA’.
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see “Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government’s other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.
We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government’s debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.
The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.
Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers […]
Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.
The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them.
The act further provides that if Congress does not enact the committee’s recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.
We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO’s latest “Alternate Fiscal Scenario” of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO’s “Alternate Fiscal Scenario” assumes a continuation of recent Congressional action overriding existing law.
We view the act’s measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario–which we consider to be consistent with a ‘AA+’ long-term rating and a negative outlook–we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act’s revised policy settings.
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.
Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.
Our revised downside scenario–which, other things being equal, we view as being consistent with a possible further downgrade to a ‘AA’ long-term rating–features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.
Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.
When comparing the U.S. to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers–Canada, France, Germany, and the U.K.–we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.
Standard & Poor’s transfer T&C assessment […]
The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.
On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.
Related Criteria And Research
· United States of America ‘AAA/A-1+’ Ratings Placed On CreditWatch Negative On Rising Risk Of Policy Stalemate, July 14, 2011
· U.S. Weekly Financial Notes: Soft Patch Or Quicksand?, Aug. 5, 2011
· Sovereign Government Rating Methodology And Assumptions, June 30, 2011
· 2011 Midyear Credit Outlook: Unresolved Economic And Regulatory Issues Loom Large, June 22, 2011
· Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now, June 21, 2011
· United States of America ‘AAA/A-1+’ Rating Affirmed; Outlook Revised To Negative, April 18, 2011
· Fiscal Challenges Weighing On The ‘AAA’ Sovereign Credit Rating On The Government Of The United States, April 18, 2011
· A Closer Look At The Revision Of The Outlook On The U.S. Government Rating, April 18, 2011
· Banking Industry Country Risk Assessments, March 8, 2011
· Behind The Political Brinkmanship Of Raising The U.S. Debt Ceiling, Jan. 18,
· U.S. Government Cost To Resolve And Relaunch Fannie Mae And Freddie Mac Could Approach $700 Billion, Nov. 4, 2010
· Global Aging 2010: In The U.S., Going Gray Will Cost A Lot More Green, Oct. 25, 2010,
· Après Le Déluge, The U.S. Dollar Remains The Key International Currency,” March 10, 2010
· Banking Industry Country Risk Assessment: United States of America, Feb. 1, 2010
United States of America (Unsolicited Ratings)
Federal Reserve System (Unsolicited Ratings)
Federal Reserve Bank of New York (Unsolicited Ratings)
Sovereign Credit Rating AA+/Negative/A-1+ AAA/Watch Neg/A-1+
This unsolicited rating(s) was initiated by Standard & Poor’s. It may be based solely on publicly available information and may or may not involve the participation of the issuer. Standard & Poor’s has used information from sources believed to be reliable based on standards established in our Credit Ratings Information and Data Policy but does not guarantee the accuracy, adequacy, or completeness of any information used.
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at http://www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor’s public Web site at http://www.standardandpoors.com. Use the Ratings search box located in the left column.
All this but nothing on S&P rating Lehman “hold” in July 2008? Feh.
Nothing new in the annals of “good”government. The question has always been good for what and good to whom? This article from the NY Times this AM provides us with a little insight into the incestuous relationship between our legislative branch of government and big business. Who is it that gets the most effective (financially advantageous) representation?
“Ex-Lawmaker Still a Friend of Hospitals”
So much for the oft heard argument that the debt ceiling issue was manufactured by those ole extortionists. Now, we need to map a path back, and it’s not an easy one!
Look a little more carefully at the S&P statement above. It is a brief summary of the rationale which resulted in their revision of the US Treasury’s credit rating. The title of the piece contains a clue to the inadequacy of their process. That brief statement uses the words assumption or projection (or some form of either word) fourteen times. How does that affect the statistical measure of error in their measurments? Lord only knows. Then skip down to the last paragraph wherein the “primary focus” of S&P’s decision making process is even more briefly described. “The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook.” There are three clauses in that sentence. The first is measurable to a much more accurate extent than all future “projections.” The second clause is again based on assumptions being used to determine a future measurement, “trajectory of debt as a share of the economy.” That one clause requires two seperate assumptions, how much future debt and future GDP (what is referred to as “the economy”). And finally the last clause is a political insight containing an assumption regarding the likelihood of a continuation of the legislative process which is the focus of that insight.
Assumptions and political insights are not the basis of a sound assessment of a complex fiduciary phenomenon, the likelihood of a debtor to pay its debts. That phenomenon is a form of behavior. The best predictor of future behavior is past behavior of the organism under review, in this case the Treasury Dept of the USofA. That debtor has never in its history failed to pay its debts. On the other hand the assessor, S&P is a for profit organization owned by the McGraw-Hill Corporation. The rating of government debt by a private for profit corporation is ripe with potential conflicts of interest. In addition to which the effectiveness and accuracy of S&P in the performance of its craft during the past decade has not been of a high quality.
All that is not to say that the issue of debt should not be addressed. S&P has made its insight of how our legislature addresses that issue. Note that I use the word legislature rather than government. There is a significant difference between the two. The legisalture makes the rules by which the government must operate. If you’re dissatisfied with the government’s performance then you are probably more focused on the inadequacy of the Congress in the performance of its legislative responsibilities. Read my nex comment about the NY Times article which outlines the inner workings of our legislature and you will better understand how the government got into this hole. Therein lies the solution to getting up and out of the debtor’s dilemma.
As Harry Truman observed we could afford a lot more effective government if you could get the corruption under control. It was one of the defining passions of his life.
The difference between AAA and AA is not that big. It’s the difference between “extremely strong capacity to meet financial obligations” and “very stong.” Only 4 US industrials have the AAA: ADP, Exxon, Johnson & Johnson, and Microsoft. It is considered more of a prestige thing than a useful thing.
That being said the downgrade could create a number of difficulties. Treasuries, considered the “risk free” rate, forms the basis for the majority of financial equations which have to be reworked, and I mentioned earlier the risk of covenant required Treasury sell offs. One under appreciated aspect of the S&P downgrade is the “Outlook Negative” designation, which warns of future downgrades.
if you were referring to the cold, i have it on good authority that even in North Dakota people go outside in winder and do not die. But for you I’d be willing to enclose the golf cart, and even invent a pellet stove that would keep it warmer than toast.
the trouble with the white ring is they have no imaginations. other than, of course, the nightmares they give themselves.
“So much…”??? you are such a gull. there is no logical connection between the S and P and the extortion over the debt ceiling… unless the extortion convinced the S and P that the congress is too insane to … uh…. raise taxes to pay the debt.
but we must not forget that S and P is also a political actor, and the whole downgrade is part of a well considered plan to shift power in this country to …. the extortionists.
Yes, that “outlook negative” designation sure would have been helpful had S&P applied it to all those toxic mortgage related assets that its best cutomers were selling a few years ago. What’s the word, chutzpah? S&P gives a pass to the financial industry on junk financial instruments and now has the balls to tell the world that the Treasury Dept may not be able to pay on Treasury notes inspite of there never having been a Treasury default on any such debt. That S&P is criticial of the Congress is fine. Let the CEO of S&P write an Op-Ed in the WSJ about the inadequacy of our elected representatives.
Barry Ritholz had a great 10 questions post on his excellent Big Picture blog regarding the downgrade here: http://www.ritholtz.com/blog/2011/08/10-question-about-sp-downgrade/
My favorite: 1. The change in trajectory of US debt was in service of Banks: It began with TARP, and continued with every other bailout/stimulus/economic plan. What was S&P’s role in creating that crisis?
AS has anybody asked the question of who gains from the downgrade?
It appears that the upper echelon at S&P are intending to play hardball, striking back at the criticisms of its ratings proclamation, not on empirical grounds, but by threatening to further belittle the credit worthiness of the Treasury Dept. Should we disregard that S&P is a wholly owned subsidiary of McGraw-Hill Corp. whose CEO, Harold McGraw is a close personal friend of George W. Bush and whose family has been closely allied with Republican Party politics since the 1930s. Might one look at these public announcements by S&P degrading the credit worthiness of the US Treasury Dept as an act of sedition?
1. incitement of discontent or rebellion against a government.
2. any action, especially in speech or writing, promoting such discontent or rebellion.
3. Archaic . rebellious disorder
Might one look at these public announcements by S&P degrading the credit worthiness of the US Treasury Dept as an act of sedition?
No. The law against sedition is very specific, and is not defined by the dictionary. The only anti-sedition law in the US is the Smith Act, and it defines sedition as advocating he overthrow or destruction of the government by “force or violence.”
You don’t need sedition anyway. They are more likely trying to bargain their way out of financial responsiblity for the MBS dreck they slapped AAA ratings on over the last decade. Fraud and influence peddling are likelier conversational topics for the S&P counsel to have with the SEC.
At least until the house GOP writes a law to make it retroactively legal.
Hey I quote selectively but as they say the whole post is worth a read. It’s MG who insists on pasting in pages of press releases.
Page 9 (additional information not included in the rating report)
Standard & Poor’s Clarifies Assumption Used On Discretionary Spending Growth
New York, Aug. 6, 2011. In response to questions, Standard & Poor’s today said that the ratings decision to lower the long-term rating to AA+ from AAA was not affected by the change of assumptions regarding the pace of discretionary spending growth. In the near term horizon to 2015, the U.S. net general government debt is projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption.
We used the Alternative Fiscal Scenario of the nonpartisan Congressional Budget Office (CBO), which includes an assumption that government discretionary appropriations will grow at the same rate as nominal GDP. In further discussions between Standard & Poor’s and Treasury, we determined that the CBO’s Baseline Scenario, which assumes discretionary appropriations grow at a lower rate, would be more consistent with CBO assessment of the savings set out by the Budget Control Act of 2011.
Our ratings are determined primarily using a 3-5 year time horizon.
In the near term horizon, by 2015, the U.S. net general government debt with the new assumptions were projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption – a difference of $345 billion.
In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP).
The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook. None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays and thus had no impact on the rating decision.
If a blog intends to set the standard for blogging, then main posters need to step up and take the lead. That really wasn’t the case with the Budget Control Act of 2011 (the debt ceiling legislation). And that isn’t the case thus far with the S&P downgrade of the credit rating of the United States of America. This lack of effort is more commonly associated with second or third tier blogs.
None of the AB main posters have bothered to provide background for or discuss the S&P credit rating downgrade. Not even three sentences. That’s unfortunate as the S&P final rating document and subsequent clarification statement were provided on this Open Thread. And more informaton in summarized form will be provided on another Open Thread.
It is also apparent that the some AB thread participants who are complaining about the S&P rating haven’t bothered to read the Sovereign methodology and assumptions that S&P provides at its website. Similarly, it is clear that they didn’t bother to read the S&P document file that begins back in April 2011 on matters related to the S&P credit rating of the United States of America. It is really all a matter of effort and research. There’s not much of that in play.
These same problems have been evident in many other individuals’ public responses provided in interviews, statements, articles, and blog posts. Some of the statements have been laughable.
There is a pathetic level of ignorance, immaturity, and political ideology bashing occurring which has very little to do with the S&P rating. A number of outright lies have been told during the last 36 hours including statements from some U.S. Government officials. Moreover, the Obama Administration demonstrated its immaturity on Friday when unnamed representatives launched their attack on S&P prior to the release of the S&P credit rating report on the United States of America. Of course, those cowards refused to allow their names to be published. Meanwhile, the President of the United States of America has failed to render a public statement. I am confident that the President will speak next week, but he needs to get his house in order. There is an astonishing lack of leadership and integrity in play.
Leaders around the world have set a serious, measured tone in their remarks. This is in sharp contract with the immaturity being demonstrated by some public figures here in the United States. There are some Government officials who have provided statements that measure up to the bar of expectation in public remarks. I will probably cite some of their statements later on. I certainly applaud their efforts.
The downgrading of the credit rating of the United States of America shall provide a opportunity for American and global citizens to determine whether the U.S. Government will get its fiscal house in order or continue to let it burn, with consequences not only for this nation but nations around the world. All while some hillbilly idiots on both coasts will continue to scoff at the idea that there is any needed urgency.
This is one of those events that separates the men and women from the boys and girls. We are going to find out who the real leaders are, in Government, industry, and all throughout the nation. The same will apply on the blogs if any leaders are to be found.
The second rate cartoons are over. […]
You don’t seem to understand that the S&P rating is more of a political Op-Ed than a reasoned statement of financial analysis. You fail to acknowledge the role of massive control fraud in the genesis of the crisis in which S&P either had an actively complicit role or at minimum enabled by failure to disclose and warn.
By choosing to critique the political gridlock at the center of our government (something hardly unique to the US) S&P has made itself no more relevant to the discussion than the laughable WSJ editorial page.
But possibly some. of the newer and more draconian anti-terrorist laws might apply. Something about giving aide to the enemy by debasing the “full faith and credit of the US.” Is there some kind of short the market strategy that might benefit from S&P’s actions? Harold McGraw and others like him might be so invested? Who knows?
As I stated: “It is also apparent that the some AB thread participants who are complaining about the S&P rating haven’t bothered to read the Sovereign methodology and assumptions that S&P provides at its website. Similarly, it is clear that they didn’t bother to read the S&P document file that begins back in April 2011 on matters related to the S&P credit rating of the United States of America. It is really all a matter of effort and research. There’s not much of that in play.”
You haven’t read the methodology.
The past performance of an organization like S&P is equally, maybe more, important than their description of their methodology. As I noted above there are enough assumptive clauses in their description of their rationale as to make their methodology suspect and to call into question the objectivity of their decision making executive staff. You want to ignore that S&P is just one more corporate entity looking to profit from their activities. You want to ignore that S&P is a subsidiary of a corporation whose executive corps is well established as a bastion of Republican Party contributors. In an activity wherein assumptions play a significant role in the out come of the process that question of objectivity is itself significant.
I note your dissatisfaction with the manner in which this blog is administered. You are obviously proficient at blogging. I suggest that you start a blog site that would better represent the ideals your hold and support. Then you can absorb the criticisms of others who may find fault with your ideas.
You appear to have no knowledge of what S&P has undertaken since 2008 to improve their rating operations. S&P has outlined that information in detail at their website and global professionals are well aware of their actions. Moreover, S&P has undertaken a major effort to provide transparency of their operations as evidenced by the new website. Obviously, you’re not familiar with any of these actions. I am not surprised at your lack of knowledge.
As for personal remark – AB hasn’t attempted to discuss this major issue thus far. I am not going to pretend that they have. There are no ideas coming from Dan’s main posters on this issue. There are no main posts discussing the specifics of the S&P downgrade. Zip… We will see if do any main posts this week. There is nothing wrong with the administration of this blog as Dan is well aware of the problems. He needs new main posters and they are hard to find. If he had 20 Rebeccas full of energy and knowledge, AB would be soaring instead of struggling. AB is considered a highly regarded econ blog with visible presence. I believe the main posters should help Dan protect that reputation.