Saturday, August 6, 2011


Downgraded. Can anything be more embarrassing for the superpower we once were?  And the Standard & Poor people saying maybe the rating will come back, but not for awhile? Does this sound like childhood, like the junior high report card that got you “No television for you until your grades get better…”  Oh, the shame, the ignominy, the sheer awkwardness of it all.  And dangerous, too, as the world hangs on the value of the dollar. Usurpers—the Pound, the Euro, the Yen, the Mark—have done their best to don the financial mantle, but it is only very recently that the dollar has been in mortal danger.

Flash back 50 years…. Are you old enough to do that?  Those were scary times too. Sponsored by the US government, 1,200 Cuban exiles invade Cuba. The Bay of Pigs landing is a fiasco, and all of the would-be liberators are either killed or captured. A few months later, the USSR erects the Berlin Wall, dividing Germany into East and West countries. Two months later, the USSR detonates a 50-megaton hydrogen bomb, the largest man-made explosion in history. There are 2,000 American ‘advisers’ in Vietnam.

The statistics are frightening as well. With a population nearing 184 million, the US is beginning to be concerned with over-population and the immigrant issue. Crime is at an all time high with 19.1 violent crimes per thousand. Homicides are up as well to 4.7 per thousand.

The GDP is $554.8 billion and the federal debt is a bit more than half that figure at $292.6 billion. Unemployment hovers at five-and-a-half percent and a first class stamp is four cents.

By 1981, violent crimes are up to 58.6 per thousand and the population has grown to 229 million. Ronald Reagan is elected and two months after his inauguration is wounded in an assassination attempt. The Federal debt is $995 billion and unemployment is at 7.6 percent. A first-class stamp costs 15 cents.

In 2001, 281.4 million live in the US. The Federal debt is at $5,807 billion—more than six times what it was two decades earlier—but unemployment is now 4.8 percent. The Twin Towers fall to terrorists; an anthrax scare rivets the nation; the US refuses to be involved in the climate accord signed by 178 nations.

Last year the US population reached 310 million. The debt has almost tripled in a decade to $13,050 billion and unemployment has doubled to 9 percent of the working population. A first class stamp is 44 cents.

August, 2011. After days of disagreeing, Congress makes an 11th-hour deal to prevent a national default. Neither side, Democrats or Republicans, emerge as a clear winner in the agreement. The deal raises the debt ceiling in two steps by a total of $2.1 trillion to $2.4 trillion and cuts an initial $1 trillion in spending over ten years. Also, a bipartisan committee will be formed to recommend $1.5 trillion in additional budget cuts. If Congress fails to act on this new committee's recommendations, then automatic spending cuts will be forced. The committees recommended cuts are expected by November.

In the words of Standard & Poor which has just downgraded the country from AAA to AA+, “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.”

Folks, we’re in trouble. See last week’s “It’s Broke, Fix it” blog for some suggestions….

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