Belmont Club

Barack and the Boehner Stalk

In the early stages of the Eurozone crisis, conventional wisdom held that the solution to the currency crisis lay in a bailout package for Greece. That is if a bailout package could be crafted for Greece the bond markets would go quiet. But as events progressed, a curious but perfectly natural thing happened. The perceived financial health of the Eurozone became a function of the whole system.  The market looked past Greece to Italy, Spain and Portugal and saw that it was rotten. It was as if a film-maker had a shallow depth of field lens and moved the focus from the immediate foreground and brought the vast backdrop into view. Behind the small problem in the Greek foreground was a putrid backcloth in the distance. The term for this was “Contagion”. A synonym might be Context.

Bankrupting America suggests the same phenomenon might be taking place in America. For the longest time conventional wisdom held that the key to maintaining confidence in the dollar lay in increasing the debt limit agreement.  Now it turns out that whatever the outcome of the debt limit negotiations, America stands to lose its coveted triple-A rating.  It quotes a Brown and White article in Politico which says:

But what really haunts the administration is the very real prospect, stoked two weeks ago by Standard & Poor’s, that Barack Obama could go down in history as the president who presided over his country’s loss of its gold-plated, triple-A bond rating.

Obama could win and lose at the same time, striking a deal to avoid default but failing to pass muster on the substance of that deal with credit agencies, which could go ahead and downgrade the rating anyway.

Financial analysts say such a move would hit Americans with more than $100 billion a year in higher borrowing costs, but it’s not just that. It would be a psychic blow to a nation that already looks over its shoulder at rising economic powers like China and wonders, what’s gone wrong? And it would give the president’s Republican rivals a ready-made line of attack that he’s dragging the country in the wrong direction.

This is nothing new. Paul Ryan has long argued that the real cause of bond market jitters isn’t the debt ceiling but the debt. It is the deficit and not any cap on increasing the deficit which is the fundamental problem.  The foreground of contention is not half as important as the background of ruin. Bankrupting America adds:

David Beers, managing director of sovereign credit ratings at Standard & Poor’s, explains why a decision on a downgrade doesn’t hinge on the debt ceiling talks: “For us, the issue is not the debt limit — it’s the underlying fiscal dynamics. It’s not obvious to us that this political divide that is proving so difficult to bridge is going to be any more bridgeable three months from now or six months from now or a year from now.“

So what’s at stake in all this? A downgrade could send ripples throughout the nation’s economy. According to the Los Angeles Times:

The more likely scenario that investors are preparing for is that a temporary deal is struck to lift the debt ceiling. But such a makeshift plan is unlikely to allow the U.S. to maintain its AAA grade with bond rating companies. Citigroup analysts say the odds are 50-50 that the U.S. will be demoted to an AA rating for the first time ever.

Such a downgrade could lead to a temporary market panic. In the longer term it could push interest rates up for everyone from bankers down to ordinary people taking out car loans, and weaken the dollar’s position as the world’s reserve currency.

Increased borrowing costs for the government could amount to an additional $100 billion a year according to some experts – a cost that will ultimately be passed onto taxpayers. Furthermore, states and municipalities, already in dire straights, will be forced to pay more for credit.

Like Brussels, Washington is learning what King Canute long ago demonstrated to his courtiers. Neither the seas nor the markets retreat on royal decree. Nature and reality does what it wants. A government that lives beyond its means for too long a period will find itself sinking deeper into the mire of debt and its frantic struggles will only sink it faster.

Hope and Change is dead. And nothing sped it to the bottom of the morass faster than the vaulting Obamacare ambitions upon which the various stimuli, high-speed rail and Green Energy boondoggles leaped upon like so many imps. It lies prostrate not because of the sinister genius of Republicans or Tea Party members, but because it ate itself to death. Like the giant dinosaurs of old it got too big for its environment to support.

Whatever happens to the debt limit negotiations — as in the case of Greece — the center must face the fact that it must slim down or starve.


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