S&P: U.S. no longer the world’s greatest nation?

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Great Britain was the greatest nation in the world in the 19th century. The 20th century belonged to the United States. Greatest nations come and go and is the recent downgrade of America’s credit rating by Standard & Poor’s a first sign that the 21st century will see a new “greatest nation”?

The political wrangling which has going on in the U.S. as the parties jockey for position leading up to the 2012 elections has appeared childish, stupid and at times, downright suicidal. It would sometimes seem that those casting a vote would rather see the entire nation go down the tubes than see themselves lose politically.

In an article dated August 5, United States of America Long-Term Rating Lowered To ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative, Standard & Poor’s writes:

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.

The ship is taking on water and some people are saying that if the captain doesn’t do what they want, they are not going to bail. What? You do realise don’t you that you’re in the same boat. If you stop bailing and the boat sinks, everybody goes down. Yes, everybody including yourself.

The same S&P article goes to explain that there is a possible future downgrade to “AA” for the long-term rating. Where is this going? In all macro-economic courses, students learn that governments differ from corporations because of their ability to tax. Unlike a company which can go bankrupt, a government can always generate new income by just raising the taxes. However is it true that such an economic model cannot go bust?

2 trillion dollar error

Right down to the wire, the U.S. government and S&P were debating the math. John Bellows, the Treasury’s acting assistant secretary for economic policy pointed out to the rating company that its assumptions about government debt were off by two trillion dollars. While S&P acknowledged the discrepancy and changed their numbers in their final report, they went ahead with the downgrade by stating: 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.

Silver Lining

The recent political exchanges trying to lay the blame for the S&P downgrade can be summed up briefly as this. The Democrats claim the Republicans have tried to politically sabotage the current government rendering it ineffective while the Republicans say that irresponsible government spending by the Democrats has lead to an out of control financial mess. It is a curious argument which leads me back to the ship taking on water. First of all, the Republicans are so diametrically opposed to anything the Democrats say or do, they seem to blindly stick to their ideology even in the face of what’s illogical. Secondly, the Democrats responded to a financial crisis that has its origins in Republican governments. The Republicans are blaming the Democrats for the solution to a problem they themselves caused.

If the Republicans refuse to acknowledge anything the Democrats say, will they pay attention to Standard & Poor’s? Will a supposed outsider give them pause to rethink just what it is they want and how they hope to get it? People like Sarah Palin and Michelle Bachman as representatives of Republican end of the spectrum have a naive, uninformed, uneducated grasp of the situation. Their sheer utter ignorance of how the world works is a frightening portend of America’s fall from grace as the world’s last superpower if the Republican slash conservative agenda takes power in Washington.

Just how scary is it? After 9/11 and just before the war in Iraq was declared, Donald Rumsfeld spoke at a press briefing. He said that the war would last 6 months and cost one billion dollars. Was that an educated guess or foolish hope?

Published on Aug 6, 2011 by AssociatedPress

S&P Explains Rating Downgrade

John Chambers, the ratings head for S&P, explains why the company downgraded the U.S. credit rating from AAA to AA+.

Uploaded by MOXNEWSd0tCOM on Aug 6, 2011

John Chambers S&P Head Explains Why They Decided To Downgrade The U.S. Credit Rating

CNN: Interview by Wolf Blitzer

http://www.youtube.com/watch?v=p339TWCjYso

References

Stand & Poor’s – August 5, 2011

United States of America Long-Term Rating Lowered To ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative

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.

Wikipedia: Standard & Poor’s

Standard & Poor’s (S&P) is a United States–based financial-services company. It is a division of the McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and India’s S&P CNX Nifty. The company is one of the Big Three credit-rating agencies, which also includes Moody’s Investor Service and Fitch Ratings.

Wikipedia: Moody’s

Moody’s Corporation (NYSE: MCO) is the holding company for Moody’s Analytics and Moody’s Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized ratings scale. It is one of the Big Three credit rating agencies and has a 40% share of the world market, as does its main rival, Standard & Poor’s; Fitch Ratings has a smaller share.

Wikipedia: Big Three (credit rating agencies)

The Big Three credit rating agencies are Standard & Poor’s (S&P), Moody’s, and Fitch Group. S&P and Moody’s are US-based, while Fitch is dual-headquartered in New York City and London, and is controlled by the France-based FIMALAC. The European Union has considered setting up a state-supported EU-based agency. In 2001, Moody’s and Standard & Poor’s market share was around 40% each, and Fitch’s market share was around 15%; the Big Three therefore held 95% of the market. However these figures understate the dominance of Moody’s and S&P, since the norm for debt issuers is to obtain ratings from these two, and only occasionally turn to Fitch, for example if Moody’s and S&P disagree.

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