The S&P Downgrade

Yesterday, the credit rating agency Standard & Poor's put US debt on a credit watch by lowering its outlook for US securities. In essence, Standard & Poor's is warning US policy makers and global investors that the United States risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt.

“If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns,” New York-based S&P said today in a report that maintained its top rating on U.S. long-term debt while lowering the outlook to “negative” for the first time.

University of California economist Brad Delong writes in the FinancialTimes:

A spokesperson for Standard & Poor’s said on Monday that there was an “at least a one-in-three likelihood” that the rating agency “could lower” its long-term view on the US within two years. US equities quickly dropped by more than 1.5 per cent. Importantly, however, the dollar did not weaken and US Treasury interest rates did not rise. The reason for this unexpected pattern is simple: the markets think this move is important not because it signals something fundamental about the economy, but because of the political impact it will have in Washington.

So what is going on? A sovereign-debt downgrade is supposed to mean that a government’s finances have become shakier. This means that the likelihood of internal price inflation is higher, the future value of the nominal exchange rate is likely to be lower, and the possibility that creditors might not get their money back in the form and at the time they had contracted for had gone up.

But if this were true the value of the dollar should have fallen on Monday. At the same time nominal interest rates on US debt should also have risen. The value of equities, meanwhile, could have gone either way: macroeconomic chaos would diminish future profits, but stocks have always been and remain a hedge against inflation.

But that is not what happened here. Instead equities fell, the dollar rose and nominal Treasury interest rates were unchanged. Given this, there are two things to bear in mind. First, you can go insane trying to over-interpret short-term market movements. Second, news comes in flavours: new news, old news, no news and political news. And it is important to understand which type this was.

If S&P’s announcement were genuine “new news” to the market, we would have expected to see the standard pattern: equities down, dollar down, rates up.

Meanwhile, if the announcement were old news, we would have expected to see no price movements at all – the smart money would already have taken up their positions. Equally, if it were no news – if the market as a whole simply thought that S&P was irrelevant – then we would have expected to see no price movements at all. But this did not happen: we did see price movements, both in equities, and in the dollar.

Instead what we saw just what might have been expected to see if S&P’s announcement is seen not as a piece of information produced by a financial analyst studying the situation, but instead as a move by a political actor trying to nudge a government toward its preferred policies.

I think DeLong is right. While Standard & Poor's said there’s a one-in-three chance that the rating might be cut within two years, the credit agency also noted its “baseline assumption” is that Congress and the Obama Administration will come to terms on a plan to reduce record deficits. And Standard & Poor's is playing its card hoping that such an agreement is more on the GOP side of the proposal. But this isn't new news. 

Here is Clive Crook on the matter in The Atlantic:

"S&P adduces no new information that I can see. Competent ratings of opaque instruments such as, oh, mortgage-backed securities would be very useful to investors (not that ratings agencies troubled to provide competent ratings in that case, obviously). But why should anybody need that kind of help in judging the soundness of US government bonds? S&P knows nothing about them that you or I don't know."

What is new in Washington is that you have a large contingent in one political party of a rightist persuasion to begin with who thinks that a work of fiction by a third tiered Russian exile is an economic treatise.

A Government Shutdown Averted . . . For Now

The White House and House Republicans reached an agreement late Friday night on a budget deal that would avert a government shutdown. The proposed six-month deal would cut domestic spending and foreign aid by more than $40 billion from the rate of spending at the beginning of this Congress. Behind the closed doors of a special meeting of the Republican Conference, Speaker John Boehner presented the package to his Tea Party caucus as at least an agreement in principle. President Obama, for his part, hailed the deal as "the biggest annual spending cut in history". GOP riders on Title X subsidies and on EPA regulations were deferred.

The House and Senate quickly approved a stopgap measure to keep the government running. The final deal would still require another vote sometime next week.

Politico has more details on what the agreement entails.

President Barack Obama noted late Friday that a last-minute deal to avert a government shutdown happened because "Americans of different beliefs came together ... Both sides had to make tough decisions and give ground on issues that were important to them. And I certainly did that. Some of the cuts we agreed to will be painful. Programs people rely on will be cut back. Needed infrastructure projects will be delayed.""

Painful for whom? Certainly not for the wealthy in this country who remain undertaxed even as their wealth accumulates to proportions of gross indecency. No, when it comes to doling out painful austerity measures, these fall disproportionately on the weakest members of society.

As per the needed infrastructure projects, well that's just insane as well. Over the past few months, Republican Governors have killed important and vitally needed infrastructure projects in New Jersey, Ohio, and Florida. I'm not sure how to recreate the political conditions that led to the interstate highway system initiated during the Eisenhower Administration, but until the American right obtains an equivalent conviction regarding the urgent need to update the rapidly decaying and outmoded infrastructure across the nation, the country will fall further and further behind in the global economy. And that serves no one.

To be perfectly candid, we have a President who refuses to lead. President Obama sees himself as some Solomonian arbiter who rises above the partisan divide to bridge irreconcilable differences. Pity, for one, that he gets few political dividends for his efforts. To many on the right, he remains some sort of Marxist Kenyan born usurper who is committed to subverting the Constitution - no matter his stance on any issue, there are some who will take the opposite position even if they have to run through harried hula hoops of hypocrisy as Newt Gingrich recently did on Libya - while to much of his base, he remains simply an enigma. What are Barack Obama's values? For what and for whom will he fight? Nearly 27 months into his Presidency, for those on the left these questions remain unanswered. 

If the Democrats won this round in the court of public opinion, which for now it seems that they did if only marginally, they did so because of the leadership coming from the Senate. It was Senate Majority Leader Harry Reid and Senator Patty Murray of Washington who were out in the front battle lines defending the rights of women to adequate health care and the cause of reproductive freedom. Honorable mentions to House Minority Leader Nancy Pelosi and New York Congresswoman Louise Slaughter for speaking out on the GOP's war on women.

The Republicans were their own worst enemies but given their base, it is unlikely to hurt them that much, though I suspect the gender gap in next year's election will only grow. Rep. Mike Pence of Indiana likely cemented his following among social conservatives. It was Pence who led the charge against Title X subsidies. Surprisingly, Rep. Michelle Bachmann showed signs of sanity being among the first on her side of the aisle to call for a clean bill, free of any controversial riders. Former Arkansas Governor Mike Huckabee who made a similar plea, however, was ravaged on conservative websites such Free Republic and Red State for merely suggesting such a compromise. Bachmann largely proved immune to attacks, suggesting that she maintains a street cred with Tea Party activists that is the envy of others on the right. One other loser, who is growing more irrelevant by the day, is Sarah Palin. She took to Facebook again with another diatribe against the President and she was unceremoniously ignored. 

Public Mood on Budget Demands Statewide Reform

From today's Beyond Chron.

Because Governor Schwarzenegger is impotent at brokering a budget, the state will be out of money on February 1st - and will start issuing I.O.U.'s.  That means no tax rebates, no financial aid and no other means of assistance.  Now we are looking at a statewide special election to get out of this mess.  If all we get is more Arnold gimmicks to delay the problem another year, it will be a tragically wasted opportunity.  Because now, more than ever, the public is willing to consider tax reform to get us out of the right wing fiscal straitjacket.  Beyond the Democrats' effort to scrap the archaic two-thirds budget rule, legislators must consider placing ballot measures to amend Prop 13 (by exempting commercial property) - and eliminate Prop 218's onerous requirement that local revenue measures get a two-thirds vote by the electorate.  With the recession wreaking havoc on our fiscal health, the public has finally woken up to the horror of right-wing tax policy.  For the first - and possibly only - time, voters might approve progressive ways to raise revenue.

There's more...


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