Eugene Robinson’s Investor’s Business Daily article It’s Clear GOP Had Its Fingers In Downgrade demonstrates within itself how ridiculous his titled proposition is. The thrust of his piece was that the GOP’s threat not to raise the debt ceiling without spending cuts is what caused S&P to downgrade the U.S.’s credit rating.
However, he states in the body of the column that “There is no plausible scenario under which the U.S. would be unable to service its debt.” His assertion is correct, unless President Obama decided not to pay the bondholders. If you recall, it is Obama that screwed the G.M. bondholders in favor of the unions with his shills on the bankruptcy court tagging along. How one could ever prioritize the union claims over secured bondholders flies in the face of commercial dealings? On to that, stack Obama’s 60-Minutes interview wherein he says “we won’t be able to pay our bills…” you then have a credible threat of non-payment.
Without a debt ceiling increase, the U.S. Treasury would have had to make choices about who to pay and who not to pay since the cash coming in does not exceed the planned expenditures. Commercially, one would prioritize bondholders ahead of other creditors, but, with this administration, you’re not really sure what might happen. Again, this raises the specter of non-payment.
The fact of the matter is that S&P knows that the “cuts” really are not reductions in spending, but simply reductions in the increase in spending. Their downgrade really is a shot across the bow of the CBO, congress and the administration in how it does its accounting. Only in government would not spending one dime more than last year be characterized as a cut. S&P is laughing at the CBO’s scoring of the plan and the purported trillions of cuts. In fact, had congress arrived at a plan not to raise spending at all over the next ten years, the CBO would have scored this as a $9 trillion cut. When in fact, there was no cut at all.
S&P knows that the only thing the government can control is the amount of money it spends. If it raises tax rates and people make less, the take to the treasury might be lower than under the lower tax rates. You’re seeing this all the time with the tobacco tax increases which continue to raise less money as people are forced to quit. What happens to the program once the funding is dried up? Instead of the program going away, the program ends up being funded by the general fund. S&P knows this.
S&P also understands that the current pact does not bind congress next year. Who can forget Democrat promises to Reagan to cut spending if he went along with their tax rate increases? He agreed to the tax rate increase, but the Democrats never came through with the spending cuts. As a matter of fact, spending went up. History repeated itself under Bush 1, and Mr. Robinson wonders why any credit rating agency would believe anything coming from a government official’s mouth.
Mr. Robinson also quotes Mr. Greenspan’s comment that we “can always print more money.” It is true that we could print our way out. However, there is nothing that requires our trading partners to take our devalued currency. How would we trade? Further, the inflating the supply of our currency should cause interest rates on the treasury bongs to rise substantially thereby exasserbating the problem. S&P knows this.
As can be reasoned from the above, the U.S. is not AAA rated and hasn’t been for some time. The only thing I will give S&P credit for is the guts enough to state what most of us already know: The U.S. government is nothing but a ponzi scheme paying off old investors with new investor’s money.
One is left either believing that Mr. Robinson has very little understanding of accounting, economics and budgeting, or he was simply trying to prey on traditional Democrat Party constituencies putting fear in their hearts. Either way, he’s wrong.