United States loses AAA credit rating from S&P
reuters.com
reuters.com
Steps to recovery:
1) End all offensive military actions overseas. Finish winding down Iraq and abandon Afghanistan wholesale. These actions have cost several trillion dollars over the last 10 years. We can't get that money back, but we can stop spending more.
2) Defense spending is in the top 3 highest budget expenditures. Cut it by 1 third across the board. Maintain important overseas installations such as Japan and Taiwan. Given China's rise, its wise long-term to keep a presence in the region. Scale back deployments in Europe unless Russia still is still a threat to western Europe.
3) The most amount of money the U.S. spends is Health and Human Services. The U.S. health system is a fucking mess. Somehow we spend the most on healthcare and get some of the worst societal benefits out of any industrialized country. I don't have an answer here, but it likely involves completely tearing down the existing system to its nuts and bolts and building it back up. I'd love to hear ideas on this point from others that know more about it.
4) Social Security is the other one. My mom relies on it, so does a lot of my family. We're from meager backgrounds and traditionally have come from poorer parts of the nation. That being said, cut it.
When I look at my paycheck and see that upwards of 40% of my income is being sucked out by the government and used more for things I oppose than things I support (e.g. war spending versus scientific investment) it pisses me right off.
Yes, I have heard the naive argument "But taxes are there to run the things you use like roads and government services that you use every day". This is true only in part. Yup, we need an army. Yup, we need local police. Yup, we need roads. Yup, we need a justice system. But it doesn't take trillions of dollars a year to run those things.
The government shouldn't interfere with business like propping up failing business models. It should work to make sure that business plays fair, i.e. anti-monopoly or collusion, etc.
I'm more liberal than conservative, and definitely not one of these people that wants business to have free-reign over everything. But there are bottom lines that we have crossed and need to back off.
And frankly, medicare wouldn't be if we killed the payroll tax cap. I never understood why it's ok for payroll taxes to be regressive.
Of course the program is most regressive for younger workers, who pay the most and will get the least in return.
Social Security is in serious trouble, by the way, although it is not the driver of the current budget crisis. In just a couple of years the program goes into the red, and increasingly so as more boomers retire. The unfunded liability is around $8 trillion. That's serious money.
Social Security can never go bankrupt, and it can never be in debt.
This is wishful thinking. Social security benefits have been promised to a lot of people, and the money isn't there. It's all well and good to say they will just reduce benefits, but that's just a nice way of saying that they'll default on the liabilities.
In reality this is no different from Medicare or Medicaid, or the military budget, or anything else. Sure, we can in theory just reduce payout. The reality doesn't work out so neatly.
Social Security and Medicare are funded by payroll taxes. Medicaid and military budget funded from Federal income tax.
If you cut military budget 100%, you will save ~900 billions (or whatever the right number is) a year. If, on the other hand, you cut Social Security or Medicare, the savings are 0, because you will have to cut their funding as well. Surely, no one will pay Medicare taxes, if there is no Medicare exist, right?
Guess what happens to the rest of the money: It gets spent elsewhere. Social security buys US Government debt with any excess, meaning it goes directly into the budget. In theory the SS trust has assets, but in reality the money is gone. It's one account holding a bunch of IOUs from a second account, and both accounts are owned by the federal government.
http://economix.blogs.nytimes.com/2011/05/17/the-real-social...
Points 1 & 2. Cut defense spending and all of the cool people will call you an isolationist. Sure, argue rationally all you want; the name will stick. Also, remember that the United States is bound by treaty to defend more than two dozen nations. That includes keeping bases in some of those nations. Those treaties will have to be renegotiated. Those nations will have to increase their own defense spending. Many of those nations have budget problems of their own. Have fun.
Point 3. Touch social spending and the cool people will call you a heartless bastard who cackles at the sight of starving widows in between gulps of baby orphan blood. Sure, argue rationally all you want; the charge will stick. Of course, this doesn't solve the money problem. Iceberg? What iceberg?
Point 4. Social Security is the third rail of American politics: If you touch it, you will die. Sure, argue rationally all you want. It will help as much as it ever has.
Long story short, the bureaucracy rules us. The administration of administrators who administer the other administers who supervise the people in charge of those who actually get real work done cannot make any concessions to reality. It would be like Gorbachev loosening the grip of Communism; one exit through the Iron Curtain and it's all over.
The Cool People will double down. They will continue to double down until it is physically impossible for them to continue doing so.
One interesting thing about your first statement, "At the end of the Cold War, other conservatives were making the same noises that you're making now". A few years ago I had the opportunity to hear Francis Fukuyama speak. He was the author of The End of History and a later follow up book. I never knew it before then, but he was one of the founding members of the Neo-conservative movement. It was originally started by him and a group of like-minded sorts around a cafeteria table in some ivy-league college (Princeton maybe?). He went on to talk about how the ideals of what they founded were adopted and warped beyond recognition by the Evangelical Christian community in the U.S. and by other conservatives. What was remarkable about the talk was that at the end, he essentially repudiated everything he had originally written in The End of History.
I remember stories my grandparents told of growing up during the Great Depression. I also remember stories from my mom's family of 7 kids growing up poor in Rochester, NY in the post-war era. Perhaps I've inherited an attitude of bite-down and deal with reality from their history.
It's downright eerie.
And it's gotten to the point where "extreme" right-wingers like Pat Buchanan are saying that the bankers and corporate executives are ruining America. Paul Craig Roberts, assistant secretary at the Treasury under Reagan for crying out loud, the guy who helped implement supply-side economics, sounds more like Noam Chomsky than George W. Bush, these days.
It's a topsy-turvy world.
One of the big motivations behind the pushing of non-denominational, stupid christianity as you get these large flocks of people attracted to the personality of the leadership of their church, but there's no doctrinal basis. The Catholics or Lutherans have their issues, but they won't allow the psychotics to retain power within their religion.
The traditional patrician Republicans are getting owned.
And Fox News had such a clear role in making the Tea Party into a meaningful political force that commenting on the connection isn't necessarily even a political statement - it's a historical statement.
I wonder if the powers that be have been purposefully trying to jam media with lots of spurious messages about, "The Truth Behind The Lies," most of which are structurally similar to actual such messages, but otherwise are just junk.
you get these large flocks of people attracted to the personality of the leadership of their church, but there's no doctrinal basis.
Really, this sort of thing isn't that unusual. In places in the US like Cincinnati, with large populations having immigrated generations ago from Ireland, Germany, and Eastern Europe, you have large numbers of people who call themselves "Cultural Catholics." Do they agree with all of the doctrine of the Catholic Church? Heck, a quite a number of them disagree with most of it. Attendance at mass is really just one way they identify their group.
Given that much of the motivation for religious practice is really group affiliation, it's no wonder there's a lot of it organized around personalities.
"Time magazine's Joe Klein has suggested it is legitimate to look at the religion of neoconservatives. He does not say there was a conspiracy but says there is a case to be made for disproportionate influence of Jewish neoconservative figures in US foreign policy, and that several of them supported the Iraq war because of Israel's interests, though sometimes in an unconscious contradiction to American interests: "I do believe that there is a group of people who got involved and had a disproportionate influence on U.S. foreign policy. There were people out there in the Jewish community who saw this as a way to create a benign domino theory and eliminate all of Israel's enemies....I think it represents a really dangerous anachronistic neocolonial sensibility. And I think it is a very, very dangerous form of extremism. I think it's bad for Israel and it's bad for America. And these guys have been getting a free ride. And now these people are backing the notion of a war with Iran and not all of them, but some of them, are doing it because they believe that Iran is an existential threat to Israel."[75]"
I have not much to add to your excellent comments, I just wanted to give you a heads-up. I grew up in a former Eastern-European country, and my childhood and teenage years were very much marked by the economic collapse of the post-communist years.
First, regarding the reducing of military spending by the US, I can still remember reading a very beautiful Soviet propaganda magazine in 1989 (with colored pictures and all) about how happy everyone was that the Soviet Army was getting out of Afghanistan and how about everyone will be happy. Then 1991 happened to them and the Soviets disintegrated under their own weight, in many cases leaving military units stranded in foreign territory because the money had just run out. I don't know what the moral of this story should be, maybe that it is never too early to cut military spending. You (the Americans) should do it now.
Second, I have nothing intelligent to say about your health-care system, but regarding Social Security I hope that you, the American people, will find a bunch of decent politicians willing to sacrifice their political careers over this. The reason being that when the money will run out (and at this rate it will definitely run out) no amount of blaming the other party or of accusing the Chinese or the Martians or whatever will make up for the fact that Government-run agencies will have no money to actual do their jobs (and no, inflation, i.e. indefinite printing of money will not help solve this, it will only make it worst). Again, I saw this happening in my country, ~20 years ago, social services going the way of the shitter and basically the entire Government-run infrastructure crumbling on its own weight. It wasn't funny at all.
Care to elaborate? (Preferably in English.)
I stopped reading your comment after that sentence with the assumption that all of your other points would be equally dumb.
The neocons are not nice people. They will call you names for all kinds of silly and/or evil reasons. And they will demand that you think of them as the Righteous Good Guys every step of the way.
Other departments can't touch the SSA's budget-- because it's the SSA's budget.
I've often argued that SSA should be allowed to invest some portion of the surplus (perhaps 10-20%) in AAA-rated municipal bonds. Perhaps the downgrade today will prompt more people to consider this.
Not having read the North Atlantic Treaty, I don't know that the US has any special obligation above and beyond the rest of the NATO members. Yes, the US is obligated by treaty to defend Latvia, but by the same token Latvia is obligated by treaty to defend the US. American deployments to Europe are likely above and beyond American treaty obligations.
And, in fact, the only time that Article 5 of the NATO treaty -- the mutual self-defence article -- has been invoked was after 9/11, when the US used it to drag the rest of NATO into Afghanistan.
The article says:
" Five NATO planes have arrived at Tinker Air Force Base in Oklahoma City, Oklahoma"
and:
"Most of the United States' 30 AWACS, based at Tinker, have been flying around-the-clock surveillance of U.S. airspace..."
In my opinion, the phrase, "a good chunk of" is dubious. In a few minutes of Googling, I could find no indication of how many missions (if any) those NATO planes flew.
http://www.nato.int/docu/review/2006/issue2/english/art2.htm...
Fred Kaplan:
"Aside from letting a handful of NATO's AWACS radar planes come help patrol American skies, Bush's response was a shockingly terse: Thanks, but no thanks; we'll handle it by ourselves. Marc Grossman, the undersecretary of state for political affairs, later admitted to the Washington Times that the United States initially 'blew off' the allies. Douglas Feith, the undersecretary of defense for policy, said that the United States, in the Times' words, 'was so busy developing its [Afghanistan] war plans that it did not have time to focus on coordinating Europe's military role.'
"The effect, of course, was to alienate the allies just as they were rediscovering their affections. As London's conservative Financial Times later put it, 'A disdainful refusal even to respond to a genuine offer of support from close allies, at the time of America's most serious crisis in decades, spoke volumes about its attitude to the alliance.'"
http://www.slate.com/id/2088113/pagenum/all/
(The similarity between the "thanks but no thanks" phrase used by Kaplan and the one used by me is a complete coincidence. I found this article this afternoon when googling for something to support a rebuttal.)
There is an ethical problem with using surplus social security revenues to fund tax cuts to non-contributors and then claim there isn't money left to pay back the workers who contributed in good faith. But this isn't a problem with bureaucracy so much as a problem with the Republican Party.
Second, you mention the money "to pay back the workers who contributed." There was never any money to pay back. Social Security was always a pay-as-you-go system. Current revenue pays for current appropriations. There was never any "trust fund," another fact that smoothed the way for Congresscritters to raid Social Security and replace the surplus with Treasury IOUs.
This system was feasible when there were ten workers being taxed for each retiree receiving benefits. With the graying of the Baby Boomers, that ratio will approach parity. Another commenter on this thread mentioned that the best thing to have done to Social Security would be to build an electric fence around it. A good idea. Too late. Congress has fleeced it.
2. Your characterization of the "feasibility" of the social security program is wildly inaccurate. Seriously, instead of turning yourself inside out trying to claim that Republicans didn't setup a system that had workers pay MORE into the system than they were taking out for 30 years, why not just roll back the Bush tax cuts and call it a day?
"Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent." –Richard W. Fisher, Dallas Federal Reserve President, May 28, 2008 [1]
1. http://www.dallasfed.org/news/speeches/fisher/2008/fs080528....
Returning to the issue of social security, the statistic Fisher cites comes from Table IV.B6 of the trustees’ report, which is extremely conservative in its assumptions (assuming essentially zero productivity growth over the next 50 years) and thus - even at the worst - would require only a minor tax addition to permanently solve without reducing benefits.
I do not much like your suggestion that since the Republicans instituted tax cuts the surplus is gone and there's nothing we can do about it, but will add only that if Gore's proposal had been adopted (Republicans at the time were championing the terrible idea of dumping social security funds into the stock market while cutting top-end taxes), even the "infinite horizon" figure would be nowhere near where it currently is and it would likely be possible to reduce the payroll tax or increase benefits. And given all this, I don't know how to reconcile your claim that this is not a Republican problem with the fact you claim to be a rational fiscal conservative.
Medicare is a another story altogether. Fact is, a 1960-style PPO for every old person just isn't sustainable when health costs rise like 13% per year.
It would be interesting if these funds could invest (limited amounts) in some other type of security, but for now, they are limited to Federal securities. Imagine the sway on the market a $2.7 trillion fund would have.
Second, that doesn't change the social contract we have with people who have spent their entire lives paying out up to $6000 a year in wages to the fund.
Third, yes, while baby boomers retire, it will run a deficit. But if the surpluses over the last SEVENTY YEARS hadn't been diverted to the general fund, they'd have enough in the "lock box" (that Al Gore advocated for in the 2000 election) to pay for 'boomer retirements.
Look at the predictions made by FDR's guys in 193(4?) about social security. They are surprisingly correct. They saw this coming. The only thing they didn't do is force a segregation of funds.
A good reason not to trust the government to keep a forced retirement account on your behalf. Someone is going to get the short end of the stick here eventually.
I would prefer that people own up to this and we set up an orderly, phased dismantling of the program, but that doesn't seem very likely. Politicians and head-in-the-sand populace apparently insist on a single disastrous collapse that leaves millions insolvent rather than admitting and accepting that there will be some controlled loss involved in a phaseout.
As for investing pensions in the stock market, I'll merely add that in Australia, where we've had superannuation for 20 -odd years, all usually invested in stocks, there were are a large number of people who thought they were going to retire in 2008 (my parents amongst them) who are now still working.
Psychologically, does it work? In general, if you tell a 22-year-old that in 40-something years he's going to really need some of the money he's making now (even if he feels like he's barely paying his bills), that he absolutely must set aside enough (and invest it wisely, assuming he has the wisdom to do so), will he manage to do it?
From what I understand of human psychology, the answer isn't "yes" nearly enough to make your solution palatable.
It sets up a good learning experience for him when he finally gets to retirement age and finds himself as a greeter in Walmart, but it's way, way too late at that point.
No one wore seatbelts before they were legally required (and still many don't, and many still die because of that dumb decision). People don't, as a rule, have a good grasp of the distant future and/or events that seem unlikely. How many people are still starting smoking, even though it says "cigarettes kill" in big black letters on that first pack they buy?
There are plenty of problems with the US social security system, but removing the safety net entirely to teach a lesson to people who fail to adequately prepare for their old age doesn't feel like a sound approach to me.
While there is some migration to the richest province, that has more to do with jobs related to the oil boom there, and the low taxes there are due to oil revenues.
Do you support alcohol prohibition? Alcohol leads to much more damage than even smoking from an emotional and psychological perspective.
What if, one day, the government decides that people who buy Japanese cars are a danger to themselves since they are costing the American car companies so much money by refusing to buy home-grown goods? The people just don't have the foresight to understand that buying Honda today means depression throughout Michigan tomorrow. Shouldn't we protect people from that eventuality by ensuring that they only buy domestic vehicles?
How far do we take this? Why do we believe that the politicians have such a heightened sense of foresight and such impeccably unselfish motives? I don't vote for people so they can do my thinking for me, I vote for people who I think will best represent important core principles, like retaining individual free exercise of conscience (like the choice to buy American or foreign cars, even if it will cost Michigan a lot of jobs).
The attitude that we need the government to protect us from our own decisions is in fact extremely dangerous and insidious. Old people survived for thousands of years before the implementation of social security -- if the industrial society doesn't support old people well enough, we have to tweak it so that these things work instead of doing these grotesque hacks of taking > 10% of an average person's salary every year to pay to support your grandpa's RV tour of the US.
This is partly why I hate political discussions as-they-are-played... everyone has such strong opinions based on incredibly tenuous links to actual history, studies, etc.. Just "this is how it is, how it has always been, and if only I were in control I'd have this all tidied up right quick."
Of course I don't support alcohol prohibition. Haven't we tried that? Did it work? Also: we weren't talking about making smoking illegal, just about human psychology, and how people aren't logical. To actually give people better lives requires science, not "more laws" or "fewer laws".
I don't disagree with you on your other examples, generally, but I'll refrain from offering other examples that are obvious in the other direction... it doesn't get us very far.
"I don't vote for people so they can do my thinking for me" -- I half agree with this. I will gladly vote for someone who has thought and researched more deeply on important topics than I have, provided they can explain themselves and advance my own knowledge. In the end we are responsible as citizens for who we elect, so I do agree it's not much use to be snowed by anyone who uses big words or says they have the solutions.
For core principles, though... this is much trickier. Principles, in abstract, are useless. I agree totally with some of my older relatives' politics, when we talk only in terms of principles ("we need better education! critical thinking!"), but when we get into applying the principles we're miles apart.
"Free exercise of conscience", what does that mean in terms of specific issues? We should rely on lynch mobs instead of police? Citizen militias to take out unfair monopolies?
I'm in favor of encouraging responsible citizens who can think critically. I'm not at all convinced that your suggestions (inasmuch as I've seen them) would do that, based on what I know of human psychology.
I also have a suspicion that your idea of what social security payments will cover is a bit overblown. I don't have any living grandparents left, but my father is losing his house and has no medical insurance, in spite of social security.
Such a decision is overridable by 50%+1 of the legislative body--that same number that is would take to spend the money.
Okay, yes, a constitutional amendment would work, but I suspect most legislators proposing a "wall" like the one in question would be lukewarm to the idea.
Just to be clear -- that would effect me, so I'm not advocating for others to pay the price.
Social Security was <i>never</i> self-sustaining. It's doomed by demographics and has been since the day it was enacted.
That's why in some ways, watching the government on the brink of default is exciting. For once there's nothing the Cool People can do.
http://aynrandcontrahumannature.blogspot.com/
and not skim and look to argue. read charitably and see if you can still buy into her ideas, after reading some articulate people dissecting them (and seeing rand's defenders try and fail to defend via the comments sections).
Basically, it went from being backed by gold to being backed by power and promise of restraint in printing more. I guess we've largely given up on the restraint side, though.
The military is not going to force the Fed to stop printing money.
Why?
China will surpass the United States in soft and hard power eventually. This is demographically and economically inevitable. Even sooner, if not already, China will become an unshakable hegemon over all of Asia. So why fight it in the most expensive and futile ways possible, i.e., by maintaining the fiction that we will be able to exercise any sort of long-term military power in Asia?
It's time we focused on our economic power, and not our military power. The former is a necessary precondition of the latter, and we're acting as though it's not.
Oh, no it's not. First China has to hold together over that time frame. This is feasible... this is not inevitable. There's a lot of tensions over there. Then even if they pass that test, there's other things they're going to have to deal with.
Right now, there isn't a single world power that's looking to be "inevitably powerful" in the next 50 years, it's really "anybody's game".
The Vatican?
Right. It's entirely possible that China can hold together as a sovereign nation, but will develop or hold onto pathologies which will cripple it as a major power. Then again, the same could also be said for other potential powerhouses like Brazil, Russia, and India. The same could even be said for the EU and the US.
As far as I can tell, this conclusion can only be reached via naive interpolation of current trends. I can't come up with one plausible scenario in which this actually happens. Most of China, population-wise, lives in a state of abject poverty, about which the government has done very little. The Chinese gov't itself indicates that nearly 10% of the population are migrant workers. The migration of peasants from the countryside to the city is already considered the largest migration in human history, and it's expected to grow drastically over the next decade or so.
No country can smoothly handle the kind of stresses that come with having most of the country living in abject poverty, and seeking migration to already-overpopulated cities. At some point, /something/ will snap - the magic bubble that is China's economy will pop, and we'll all realize that being gigantic is an impairment, not an advantage.
Put another way: at some point, China's ridiculously poor standards of education and health care will catch up to its economy - and the western companies that have been moving (partly) there, helping to fuel the growth, will stop doing so.
Your point about economic vs. military power is, of course, valid, and largely irrefutable. I would add that, as China does seem to be a relatively stable country - with a competent and, most importantly, sane government - they stand little to gain by way of aggressive military action. We may do well to let them police their part of the world (read: keep North Korea in line), trusting their own rational self-interest, and save ourselves the effort.
The problem is, it wouldn't work. The economy, as small as any small country, isn't a piece of programming. You don't audit and refactor, or rewrite parts and plug it all in. It's made of generations of flesh and bones, all of which have worked their guts out to get whatever it is you're trying to take from them.
In a tyranny, maybe. In democracy, you have no chance of getting anywhere which such an overhaul.
Some democracies are not republics--the UK is a constitutional monarchy. Some republics are not democracies--the Roman Republic was an oligarchy and to some extent the early United States was, too.
You ABSOLUTELY audit and refactor a society. Every time the country has gotten a bit more free with a new law or court decision, that's a refactor that improves the system.
Sometimes people have added parts to the system or revised bits that end up for the worse. Examples include Prohibition, Jim Crow laws, Defense of Marriage Act, software patents, etc.
One thing that would help society out a lot would be societal unit tests. Set baselines as to what works and doesn't, and if some new changes breaks the tests you go back and refactor again.
Another analogy that I like to use is one that relates governments to operating systems:
Federalism is a microkernel operating system. The states are user land processes where we can experiment with the code without taking down the entire system. When we discover something that is a universally good principle, we implement it at the kernel/federal level. After all, another name for the states is "Laboratories of Democracy".
Is it largely salary payments to current troops? Wouldn't we have to deal with a large unemployment problem in case we laid off a bunch of military employees and told them to go find a job somewhere else?
Or is it payment to defense contractors, such as Valley's own Lockheed Martin? Wouldn't this cause a large number of people to be unemployed, contributing to recession?
There are times in history where government spending can help, like during the Great Depression. The government spent a lot of money on public works projects to help put some people back to work. But this didn't do much to actually end the depression. It was the onset of WWII and the subsequent ramp-up to a war economy that really ended the Depression.
What really turned the economy for good imo was not WWII but the result of WWII -- all of our competitors on the international stage having large parts of their population and infrastructure destroyed. A few year grace period while the rest of the world rebuilt turned into 50 years of global corporate hegemony.
The most basic task of government is to maintain a stable social order (see, e.g., the preamble to the U.S. Constitution). With sustained, pervasive unemployment comes social unrest (see any number of examples from the past 100 years). So ....
> The government spent a lot of money on public works projects to help put some people back to work. But this didn't do much to actually end the depression. It was the onset of WWII and the subsequent ramp-up to a war economy that really ended the Depression.
According to most economists (from what I've read), the New Deal was doing OK at getting people back to work until 1937, when the government suddenly cut its spending and raised taxes. That threw the economy back into recession.[1] And yes, the massive deficit spending of WWII did indeed pretty much take care of unemployment, and then some.
I must say I don't see this language appear in the preamble of the Constitution. The Preamble outlines the purpose of the Constitution to "promote the general welfare" -- not to "provide the general welfare". All a reasonable, healthy government can do is provide a few basic structures for its people to build off of, it can't support the whole country (or really anyone) by itself. Unemployment is a governmental problem only insofar as governmental policy impedes useful production; anything else is pandering politicians attempting to dodge the wrath of an uninformed, slothful populace (because the politician likes prominence, money, and power).
However, laid off militants are likely to apply for unemployment benefits + whatever other entitlement programs they have. So in terms of pure numbers there might be some win, but when you cut $100 of military salary, you don't magically save a total of $100, you generate some liabilities on the other end.
All those military salaries also generate income taxes for Federal and state coffers, so now you've got lower revenues to deal with, too.
Perhaps initially. The military population in general is disciplined, educated (or even technically inclined), proud, and self-reliant. I've got to think that demographic is more likely to respond to unemployment by going out and doing stuff than any other.
Maintenance and operations 41.35% Military personnel 22.5% Procurement 20.45% Research, Development, Testing & Evaluation 11.54% Military Construction 3.49% Family Housing 0.145% Total 99.45% (I'm lazy too and rounded too much. Hey it's just 359.6775 millions that are missing...)
http://en.wikipedia.org/wiki/Military_budget_of_the_United_S...
So keeping the lights on and the water running is 42% (there was a link that the Pentagon spends more on air-conditioning in Iraq and Afghanistan per year than NASA's entire annual budget). Much of that cost must be due to maintaining offshore bases.
22.5% pays for the salaries of everyone from grunts to Joint Chiefs. I'll say that getting snazzy new hardware comes under Procurement, R&D, and Test & Eval. So, let's say 32%. That makes 22.5% versus 32% for personnel versus hardware. It's not parity, but it's in the same ballpark.
The biggest bite comes from maintenance & ops, of course. That figure has to include the cost keeping Navy boats afloat. No way to chop that down without also cutting down personnel. After all, if you cut the number of facilities by half, there will a lot less space for the personnel to stay in and fight from. Doing that has to have non-trivial effects on military readiness and the perception of potential enemies.
None of this is easy.
Is that a rule?
Nice little overview: http://en.wikipedia.org/wiki/Universal_health_care
This is of course beyond the pale of rational discussion in U.S. political discourse. Just whisper "socialism" and it's off the table, instantly.
For too long, babyboomers have relied on social security as a sort of no-interest loan. Why put that extra money in my 401K when I can rely on social security? I'll get a second car, or we'll take a yearly family vacation overseas...
Also, simplify the tax system and close loopholes, but do not directly raises taxes.
I don't think the Social Security program is at all broken; what's broken is that we've used the Social Security surplus over the last 20+ years to help fund a general fund spending deficit.
If the populace doesn't have the discipline to control and organize their extra resources, how can we expect politicians to do so? And why do we even trust them to do it? It's sad that people with the attitude you've described were able to convince the government to enact this as a mandatory thing -- but, the government likes money. We've seen what a faithful steward they have been for us.
People without the self-restraint to save money for a period of time where they expect to live without performing any money-generating work have problems that can't be fixed so simply. Maybe that's the cause of all of this turmoil in the first place.
The idea of "retirement" is also a curious new invention; people didn't save for retirement before the industrial revolution because back then, people would own houses and lands, accumulate real wealth that could be used to sustain life (e.g., agricultural assets) when individuals got too old to perform the work themselves, etc.
The pace of change since the 1860s has been extremely staggering and has introduced many concerns that hadn't existed previously. It is an intriguing matter to be sure. Hopefully we can come out of it all right.
It isn't entirely true, though. If you look at any net worth by age chart, the values go up with the age categories. People do save, just maybe not enough.
Have a law forcing people to put the money into a conservative retirement plan of their choosing.
"I don't think the Social Security program is at all broken; what's broken is that we've used the Social Security surplus over the last 20+ years to help fund a general fund spending deficit."
Absolutely true. But we've also used that surplus to spend much more on current retirees than they ever put in.
BTW, a friend and I also thought of this idea independently; we called it "mandatory taxes, voluntary distribution" [1]
[1] http://canadaduane.posterous.com/mandatory-taxes-voluntary-d...
In 2000, voters thought they picked "humble foreign policy", "deregulation" and "lower spending" in the primary. It turns out they voted for the exact opposite.
About 2 years ago, voters thought they picked "not forcing people to buy insurance they can't afford". They also voted for the exact opposite.
You could now (effectively) vote for a candidate or party and through your allocation of tax dollars keep them on a leash. It would allow for a more nuanced political system. For example I might vote for a deficit reducing Republican but I don't trust them to keep their hands off the EPA so I give environmental protection 50 points. Maybe I vote for a Democrat but I still think the deficit is really important so I put 50 points on deficit reduction. This would add a whole new dimension to politics and give some power back to the people. It would in my opinion make the commons relevant again. As it stands today I think many Americans are feeling like their vote is no longer all that important. You get two choices, you vote for one or the other, pat them on the back and cross your fingers. That's just not good enough. By controlling a few hundred billion dollars of the budget we might find ourselves on equal footing with PACS, lobbyists, media tycoons, etc.
Of course there are a lot of practical details I didn't address. It may be this could only cover domestic discretionary spending, or perhaps you could only allocate your tax points every 2 or 4 years to provide for more stability and of course for long-term deficit reduction it would have questionable value since the overall level of spending/revenue would still be playing a central role.
Now, if we could vote on Congressional salaries, that might be interesting.
of course, this can't happen because any politician who doesn't parrot the "America is the greatest country in the world" message gets ousted.
On the business front propping up failing business models is a tough one. There is something to be said about preventing a complete and sudden collapse. The number of unemployed would hit the system in so many other ways. What we have seen from the auto industry, as much as I disagreed with the bailouts, is reinvention and retooling. I hope they take their bailouts with a great deal of thankfulness and invest wisely. I look at the next generation of companies like Tesla Motors and hope that more auto industry giants will seek to innovate and evolve rather than focus on just getting bigger (and slower).
The message I believe we all (conservative and liberal) can and should agree on is respect for the tax payer dollar. Money in government isn't free, the debt and deficit isn't free. As they plan out capital and operating expenses they need to do so with an passion towards building a better country while taking calculated measures and risks. Government's role, in my mind, isn't to innovate itself but instead to facilitate innovation by its people. It should focus on facilitating the success of the people through "just enough" regulation which means refactoring how they work on a regular basis to find the most effective means in which to operate. They need to continue to question their own purposes, not get comfortable in the security of a public sector job for life. Most importantly they need to share with their shareholders, we the people, on their progress in an open and transparent manner. I don't need fancy marketing campaigns to tell me about the good work that they do, but I don't want to see them hiding it either. One way to do this is to add a more direct measure of how tax dollars are spent. In Canada we pay a good portion of our taxes into a general revenue pool. I would like to see that eliminated in favour of a clear indication of what portion of my taxes go towards specific ministries or sectors of government. I think that next level of granularity would provide a bit more awareness that public money really belongs to the public.
He's also neglecting to make a real comparison of the services that private health care provides vs. Medicare. Sure, private insurance premiums may have risen faster than Medicare spending during the '90s, but Medicare wasn't even paying for prescription drugs (a huge cost driver) until Part D was implemented in 2006.
This is fairly widely claimed, but it's a pretty weak claim. Doctors are not required to accept Medicare. They choose to do so. They choose to accept the rates Medicare offers. When one party offers an amount for a second party's services, and the second party accepts, they have just established the market rate for that transaction.
This claim also conveniently ignores the fact that insurance companies do the same thing. Check over a medical statement from your insurance company some time. You'll see where the doctor billed $300 for "nasal deconfrabulation", your copay was $25, and the insurance paid $125. Total due: $0.
> He's also neglecting to make a real comparison of the services that private health care provides vs. Medicare. Sure, private insurance premiums may have risen faster than Medicare spending during the '90s, but Medicare wasn't even paying for prescription drugs (a huge cost driver) until Part D was implemented in 2006.
The status of Medicare in 2006 seems to have little relevance to Medicare today. The first question is how much Medicare spends today per client vs how much private insurance spends per client, on average. The second question is how coverage differs in these scenarios. How does Medicare compare to the average insurance policy? I don't know the real answer to these questions, but I know Medicare's coverage or lack of coverage for prescription drugs in 2006 isn't relevant.
Not when second party holds a monopoly on a certain patient population, as does Medicare for the elderly. The healthcare market is so distorted by government intervention that calling anything a true 'market rate' is laughable.
It's not medicare, but there have been instances where hospital systems have dropped (or threatened to drop) medicaid because accepting and dealing with it became too onerous.
And again, doctors do not have to accept Medicare. It doesn't matter how "monopolistic" Medicare is. There's no force that makes doctors accept it. They can simply decline to accept Medicare just as they can Aetna. If Aetna pays below the rate a doctor is willing to accept, then they simply don't work with Aetna. The same applies to Medicare.
The US needs to come to the realization that it is part of the world economy and not the ruler/leader.
A large percentage of the US economy was damaged in the events that occurred after September 2001. Trying to to do business, travel or get workers to the US requires so much paperwork that a lot of business has simply gone elsewhere. Even trying to do financial trade in the US these days ends up with so much taxes or the threat of your money being taken as it may be linked to some terrorist organization.
And your health insurance.... well I like collecting dividends. If you like I could go into the oil industry, I will say thank you to the American tax payer for electing to go to war and making me some money.
The US has managed to dig itself into a great big hole and gave people like me money. Congratulations on your sinking economy and thank you.
So keep watching that propaganda you call Fox News :)
This should free up a lot of money that's being wasted on ruining people's lives right now, and make more money from taxing legal drugs.
As a bonus, it'll get rid of a lot of organized crime. Witness what happened with the repeal of Prohibition.
I whole heartedly agree that drug prohibition should be repealed, and that we need to put an end to the war on (some) drugs.
But, the military, social security, and medicare comprise approx. 70% of the budget, so it's really not going to help us solve the debt.
Also, the 'It is only a small fraction' argument is weak. If you really try, you can cut the entire budget into smaller parts.
Sure. And just because it's a small fraction doesn't mean it shouldn't ever be addressed. But should a 0.5% line item take precedent over three items which combined total to 70%?
When you need drastic improvement fast, it's just a waste of time to dally on pet agendas that don't represent a significant chunk. Get to them later when you have the time and energy to spare.
Is it any less of a waste of time to talk about those three items, each of which is considered a core concern of one of the two parties in control and will likely never be properly gutted?
If you can't afford the shit that you're unwilling to live without, you need to find a way to make more money. To me, America seems to be in this situation, yet the anti-tax sentiment is so strong here that that stark reality is never addressed honestly. People fairly broadly want these things, so we best find a way to pay for them.
Personally, I'd love to see a situation where the tax rates are mandated to be mere functions of spending, rather than being negotiated as if they're completely disconnected entities. Then Congress has only one knob to fiddle with, how much they want to spend. By letting them decide completely independently how much they want to make we expose ourselves to the obvious outcome, that a lot more goes out than comes in, and that's never going to be properly addressed unless we take it on directly.
You cannot raise enough taxes to balance the budget. Based on income, you'd have to raise approx. 175%. Based on all taxes you'd have to raise by 50%! Such enormous tax increases would destroy business, investment, and people's paychecks. We want more people paying the same rates through economic growth.
It's not a waste of time if you want to balance the budget to focus on medicare and the military, but addressing the war on drugs is. I already provided numbers proving this. The fact that two parties aren't addressing them is why everyone is pissed off and freaked out. Neither party has introduced a budget that is balanced, or even on a path to being balanced.
Poeople don't want taxes raised, but they don't want medicare cut. So they borrow. And borrow. And borrow... and now borrowing is hurting us because we've done it so much. Eventually we won't be able to borrow anymore. Infinite borrowing is consequentially the same as defaulting.
Fareed Zakaria said in February 2010: "But, in one sense, Washington is delivering to the American people exactly what they seem to want. In poll after poll, we find that the public is generally opposed to any new taxes, but we also discover that the public will immediately punish anyone who proposes spending cuts in any middle class program which are the ones where the money is in the federal budget. Now, there is only one way to square this circle short of magic, and that is to borrow money, and that is what we have done for decades now at the local, state and federal level...So, the next time you accuse Washington of being irresponsible, save some of that blame for yourself and your friends."
As an example, let's say you decide to cut 30% on defense. You cannot realistically do that by deciding to drop, say, the navy. There are lots of dependencies to consider (does it make sense to have marines, but no navy? Should we perhaps keep a small part of the navy for supporting the marines? What part? Can the air force maintain a global presence without carriers? If not, how many carriers do we really need? Can those carriers do without other ships for protection? Etc) People in charge will delegate filling in the details and suggesting a coherent set of cuts to subordinates.
After a few levels of such delegation, people will be talking about such 0.5% items. For that reason, I do not think you should ignore such smallish items.
It already happens with cigarettes. http://www.npr.org/templates/story/story.php?storyId=1299345...
It already happens with cigarettes. http://www.npr.org/templates/story/story.php?storyId=1299345...
And it's a lot harder to differentiate illegal goods from legal ones if the physical item could be either.
I'm not saying whether we should or shouldn't legalize it, but I keep hearing people say "legalize it to remove the criminal element and tax the heck out of it." That doesn't necessarily end the associated crime issues.
They are proponents of ending all offensive military action overseas, and cutting government spending and red tape.
They have an excellent system that makes it easier for USA people to contact their government -- you put in your name and address, and they give you a simple "contact us" form (just a single text area) where you can write your comments and they automatically get routed to your reps in Congress and Senate -- very efficient use of the voter's time!
I agree, the healthcare system is a complete mess, but think of it like re-writing software. Sometimes continuously refactoring code is a much wiser decision than completely re-writing the code
As an incrementalist coder, it frustrates me to see how non-incremental the approach to solving social problems often is. Decouple, solve one thing at a time, etc.
Maybe they can pull that off by paying themselves all the profits, but there's no way that I buy that hospitals have thinner margins than grocery stores before that. Hospital administrators are very well off on average. Their fees are way too large to be running so close to the wire, given their expenses.
This is the most recent I found -- a median of 3.1 percent: http://www.reuters.com/article/2009/08/19/us-hospitals-usa-i...
http://en.wikipedia.org/wiki/List_of_United_States_Air_Force...
Once you realize that the military is not a collection of armed forces so much as it is the US's largest social welfare program, these policies and figures start to make more sense. Put it this way: We're paying our troops there so we don't have to pay them here.
Don't look for this to change anytime soon.
http://www.npr.org/2011/06/25/137414737/among-the-costs-of-w...
We are spending 20 billion a year to truck energy supplies across some of the worst terrain in the world so that we can provide AC to thousands of horridly inefficient tents for our soldiers in the field. For comparison, that's more than the entire yearly budget of NASA. And its only one of numerous logistics and support costs we incur in our active warzones.
This might be a good time to read Paul Graham's article on PR: http://www.paulgraham.com/submarine.html
(I don't mean this as an attack on araes or the suggestion to reduce military spending.)
The main point not being the specific final total, but rather that the cost, and other logistical costs like it, would be reduced or possibly eliminated if troops weren't in the field.
what this argument boils down to, for me, is "we need to keep killing foreigners so that our economy doesn't suffer", and this is a morally reprehensible position.
Plus, how much of the money that we funnel to Iraq actually goes back to the US economy, compared to if we spent it in the US directly?
That is the root cause of the problem. Until that is solved, there's no point in dreaming up efficient solutions, because they won't happen.
I don't think the american people are dumb or lazy, I think they are very complacent.
Americans have become so used to their fairly high standard of living that they are ignoring substantive issues and focusing on trivia.
My personal prediction is that the voters will wise up and listen to smart people who understand the issues eventually. At the moment though americans just see high gas prices and demand their government fix "the problem", they aren't interested in the challenging geo political, economic and social complexities.
How far amercia falls on the way to this correction is difficult to tell.
edit: just in case anyone thinks I am america bashing, the above applies to most of western europe as well.
There is no way that basing a representative democracy on geographical cohorts can be optimal. I assume it is based originally on logistical constraints, but today is something we just accept because it is how it has always been done.
Wouldn't it make more sense to divide the political arena based on the scope of the issues allowed to be legislated and not on the origin of the legislator? Or maybe we just need a stronger 10th amendment.
It will never happen. I know. Wishful thinking maybe.
This isn't true at all. There was a group of founders led intellectually by Alexander Hamilton who believed in a strong central government and who saw the federal Constitution as giving that government very broad powers.
This is in opposition to the Jeffersonian view of limited government, the primacy of the states, the ideal of the yeoman farmer, etc.
> Because the people in power like power, and because the populace is complacent enough to allow it, they ignore any structural inconveniences like the fact that a strict reading of the Constitution forbids almost all federal programs and activities that exist today.
This also isn't true. Setting aside whether the Constitution forbids, say, the Department of Education or whatever, we have the government we have because that's what people have voted for. FDR was elected president 4 times. The New Deal was popular at the time. He wasn't cramming it down the throats of a credulous population.
It's a good thing that the Constitution is malleable enough to continue to support the wishes of a majority of Americans. If it isn't, we can either amended it so that it does (which we have done when needed), or, in an extreme case, replace it completely.
The Constitution exists to serve the people, not the other way around.
The politicians and voters are corrupt: I agree.
The American military budget is clearly unsustainable, but that doesn't mean an end to foreign wars is in their economic interest. It's no coincidence that the US has been both the most prosperous nation on Earth, as well as the most aggressive, for nearly 200 years.
Take a look at the history of US military actions on Wikipedia [1], and see how many times the phrase "protected American interests/property" is mentioned.
[1] http://en.wikipedia.org/wiki/Timeline_of_United_States_milit...
http://qed.princeton.edu/getfile.php?f=European_Colonialism_...
In conclusion, you've made a spurious correlation.
Also, no need to say "in conclusion" when the sum total of your argument is a single sentence.
I'm not trying to insinuate that the US is rich only because it has invaded countries and overthrown governments when doing so suited its economic interests, only that that behaviour has played a large role in its success. As such, the commonly-held libertarian view that an end to military adventurism will be a boon for the US economy strikes me as naive. I still think it's the right thing to do, but I don't argue for it on economic grounds.
Driving economic activity by having the military act as a major consumer is really just running on a treadmill. We need to find an outlet which will lead to increases in economic activity. There is a huge investment hurdle involved, but space exploration and colonization could fit the bill. Once there is a significant human presence in space beyond low earth orbit, there will be tremendous economic growth. The major problem is that hundreds of billions of dollars of investment would be required to jump start it.
I think you're missing my point. It's not that military spending drives manufacturing, service, and R&D industries (although it does), it's that direct military action has often been, and is often used to promote US economic interests. See the military's actions in Latin America in support of United Fruit, military support of right-wing (pro-US and pro-business) dictators everywhere, or the military-political interventions in the Middle East in support of energy interests.
My contention is not simply that making tanks is an economic activity that many people benefit from, but that those tanks are used to assert and defend economic dominance, which has a massive spillover effect for other industries.
And the need for the assertion of force to defend economic dominance in turn cements the need for the military machine and perpetuates the military-industrial complex. We are essentially in agreement. I think it would be better for the US to concentrate on economic dominance through sheer commercial and industrial awesomeness combined with forward-thinking research and exploration.
You missed my point. Sure, space exploration won't cure our economic stagnation in the 1 to 30 years time frame. But it will decide if we are a first, second, or third-rate power in the next 100 years.
There are many paths to wealth. Germany is rich because of - in part - the almost total rebuilding of a ruined nation and the creation of a pretty effective post-war consensus in West Germany. In fact, I'd argue that an important part of the US's success were also an effective post-war consensus (different, but also hugely effective).
Not really, have you been in England, Rome or Spain?
Rome legionaries were used to make roads and bridges and mining 90%of their time. If I show you the extensions of the land they "washed" to get mineral you won't believe it(you can see it using google earth, e.g in the north of spain, look for grooves around mountains).
England made itself rich because of commerce, like Spain(they took the risk to travel the ocean and won the first mover advantage, and when the rest of the world notice, it was late for them). That was what made them rich, not the military.
The US is rich because... IT IS RICH. It is a huge place with huge resources for a small population.
The US became the more powerful country on earth because Japan and Europe totally destroyed itself by the military in the WWII. The US waited for them to auto destroy, and then entered the world and finished it with all their cities untouched, 90% of the world gold reserves and creditor to them all, being able to force the dollar as world currency and english the official language of aviation, and naval commerce. Every body lost their colonies and US got them all(they just wanted the commerce and influence without having to build roads like English or Portuguese did in Africa).
Yes, it was a coincidence(being far away), no, US was not the most prosperous nation on Earth 200 years ago. If you believe in that, please study some real history. US was not the technical leader that is today thanks to all the Europeans that went there thanks to Hitler(militarization and economic totalitarism), the Edisons, the von Brauns and von Newmans.
Thomas Jefferson and other of the US founding fathers thought a permanent military and central banking would ruin the country because military people do nothing while things work at it should they need to create new enemies so they can justify their existence.
I had family members that were in Soviet Russia when something like 95% engineers were used in the war industry, while people needed cars, washing and sewer machines. This was not wealth for Russia, that was a bully inside. Mass media brainwashed them all them about how cool they were being able to destroy anybody else.(This strange pride remains today)
Today 60% of the engineering in US goes to war efforts, 50% of all their money to the military, so they can kill better, while the rest of the world expends significantly less.
They will talk about GPS, but the question is if this money expended in real economy would be able to create as much as the military does?
Military spending is still government spending. It's going to contractors, vendors and soldiers. They are, respectively: making jobs and selling to everybody (not just the gov't), and buying cars and houses.
When the government spends a million dollars building a bomb, it also creates a bunch of jobs for the same reason.
The thing is, a bridge gets you a useful public resource that makes lost of people's lives better and encourages economic growth by making trade easier. A bomb blows up, kills some people, and disappears.
If I pay you $100 to clean my house, you've got $100, and all I've got is a clean house. Nice, but there's no market value. There's no multiplier effect.
But there is SOME utility to the gov't injecting capital in the form of military spending. As I mentioned in the comment below yours, the most extreme example of that is WWII, which finally and permanently ended the Great Depression, in a way that the WPA/etc building bridges just did not.
But remember that what did more than anything to cure this county of the great depression was the massive Keynesian capital injection that we called WWII.
The rise of a professional military is often cited in as a major factor in the decline of the Roman Empire. Military Conquest drove economic gain, which provided wealth, which in turn motivated greed and more conquest.
Nowadays, we don't need conquest so much as the economic activity motivated by a military, but the same cycle is there, minus the emphasis on holding territories.
It's curious to think about: The reason a state needs particular access to petroleum, is to support a large mechanized military of the kind first realized on a huge scale in WWII. This petroleum resource now creates a US dependence on other nations, which in turn justifies a large military. While a lot of other things we do need oil, there are alternatives which could offset a lot of those needs. None of those is viable for a mechanized military, however.
http://www.dancarlin.com/disp.php/hh Death Throes of the Republic: The Fall of Rome
You will find so much fantastic similarities to our own downward spiral, re: military, political class of protecting special interests, where near the decline, voting blocks were outright purchased, etc. He brings together several historians, records, etc.
The entire series is wonderful, and you WILL find yourself spending way too much time on them :)
-TARP
Until we decide to have the bank lobbyists pay for their transgressions we will continue to be in deficit no matter what entitlement cuts are passed.
Two options:
Right now individuals pay 2/3rds of gov expenditures not corporations.
1. Reform corp tax law. There should be no Google or MSFT only paying 5% instead of the full 30% corp tax.
2. Reform internet sales tax. If states have adequate tax revenue than the Education and Medical entitlements on the Fed level can be cut back.
TARP was $300B, of which the government will recover all but $25B, according to the CBO. The "bailout" in general (considering all acts that fall under that umbrella term) consisted of about $3.5T in payouts, the vast majority of which is expected to be recouped.
Also, you're confusing debt with deficit. The debt is $14T, the deficit is just over a billion. Your 85% figure appears to have been drawn from your sphincter.
The US budget deficit is far more than $1 billion.
http://www.bloomberg.com/news/2011-03-10/u-s-had-record-222-...
See http://en.wikipedia.org/wiki/File:Income_Taxes_By_Country.sv... - all top countries are democratic.
The US hasn't had a base in Taiwan for 30 years. Maybe you're thinking of Korea?
These two graphs are quite telling: http://www.rwjf.org/images/pr/thumbs/full/45110.jpg http://media.economist.com/images/20090627/CBB677.gif
I think the problem is manifold, but here are some things that may be problematic (please let me know if you agree or disagree):
# Doctors risk getting sued for maltreatment, and thus they prescribe all possible medications, take too many samples and generally spend too much resources.
# On the same note, they also pay large insurances against lawsuits, increasing the costs further.
# Medicine prices are higher in the US, for reasons I don't fully understand.
In our system you need to have health care insurants. Its alot to pay but as far as I can tell we have one of the best systems and everybody really gets good treatment (my father is a doctor my mother is a nurce and my sister is studying medicin). Witch seams not to be the case in america (I watched Sicko, other then that I have know knowlage).
I can only compaire to some other europen countreys but when you get hurt in italy for example the first rule is to get to switzerland as fast as possible.
It is not a coincidence that Presidential elections are as close as they are. Politicians essentially buy votes to get elected, in the form of government programs.
The problem in this country is medical entitlements - not so much Social Security. Social Security in theory funds itself, although Social Security's funds have been raided to fund other programs which now jeopardize its future.
Politicians will not address medical entitlements, because they will lose too many votes in doing so. Ultimately it's these medical entitlements that will bankrupt our country, and in the process, cause the greatest transfer of wealth in the history of the U.S. - not from the rich to the poor, but from the young, to the old.
Most people who support medical entitlements do so for "selfish" reasons, in that they want those entitlements to be available for themselves, their family, and/or their friends. They say things like "health care is a right," although it obviously is not a right. Health care is essentially the result of man's labor, and to say you have a right to health care, is to say you have a right to impose your needs on another man. Which of course is silly and inconsistent with the American constitution.
Still - people will assert their right to medical entitlements, and politicians will oblige, which in the long-run will pull money away from business investment (not all businesses are rich with billions in cash). The added financial burden will either stifle entrepreneurship and innovation, or it will send it oversees.
Of course, anyone who stands up against medical entitlements, like Paul Ryan, will be referred to as a villain who wants to murder old people. To quote the President: "throw grandma off the cliff."
That's my long-term prediction, anyway.
In the short-term we will continue to go through up and down cycles. Each down cycle will bring fear. Each up cycle will bring relief. There will be booms and busts in America's near-future, although the booms will be short-lived, and the busts (like our current bust) will be longer-lived.
To the extent innovators, like many of the people on HackerNews, are able to create great innovations, we can postpone the day of reckoning for our country.
3) Health care: it is screwed up because of the economic model. A single payer system is much more efficient with the government overhead at 5% vs private at 20%. Allow the govt to negotiate drug prices. Currently it's prohibited by law. Streamline the FDA without losing effectiveness.
4) Social Security is in decent shape. Dont cut benefits. If necessary, raise the retirement age. That's a fair trade-off for improved health care.
+ Fix campaign financing to remove the "hidden" corruption that is distorting Congress. Roll back anti-trust a hundred years to the age of the trust-busters. Roll back Republican/Bush deregulation so that banks aren't too big to fail, so that Rupert Murdock doesnt own all news channels. Cone down hard on regulatory capture. (The govt gang that was watching BP should be in jail.)
Edit: Oh yeah taxes. Roll back the Bush tax cuts. My share of the tax cuts was $300 on a 6 figure income. At the time I wished Bush has gone for deficit reduction. The $300 made very little difference to me. Close the loopholes. The oil companies dont need subsidies.
First, interest will go up. US Bonds are now considered riskier than they were before. This means investors in US Bonds will expect to collect more interest due to the greater risk they are taking. Instead of paying China and Japan 3% (for example) on $1 trilion (each), the US will now have to pay 3.5% (and climbing). Of course, the higher the interest rate, the harder it is to pay back (the quicker a new ceiling is reached), the likelier this happens again.
There could be some pretty massive dumping of US bonds. A number of foreign investors can only carry AAA risk. (It's kinda unclear where they'll run to though, since I think all the other AAA countries combined don't issue as much debt as the US). So, the economy might take a pretty big hit by losing all those investors.
Now, generally you need 2 of the big 3 rating agencies to trigger any of this. So it remains to be seen whether Moody or Fitch will follow. I think they both will.
Also worth mentioning is that Canada recently came back from a downgrade (by S&P) mostly by tightening their spending belt. Took 10 years (1992-2002). Australia did it too, though it took 7 years longer.
If the U.S. falls back into recession we'll take everyone with us. Other countries know this. Banks know this. Institutional Investors know this.
Increase the interest rate on the U.S. and you'll trigger an increase on the U.S. consumer while exacerbating the U.S. debt crisis (which is the whole reason for the downgrade). That would guarantee a recession and would bring every investment down.
Finally everyone knows what S&P is up to. You said it yourself. They aren't happy with U.S. policy and they've been able to bully other governments into austerity in the past. So they think they can do it here. But S&P's opinion of U.S. policy isn't going to be enough to convince investors to willingly create another recession
(Please note I'm in favor of austerity and think we're already headed into a recession I'm just realistic about S&P's limited power)
The whole point of a rating agency is to provide you with research that you couldn't get based on your available resources. But every economist in the world is a resource on the U.S. Government's viability. You can turn on CNBC and get 24 hour coverage of it.
So the U.S. is a special case and the ratings agencies don't mean all that much in regards to it.
While that may have been true a couple of years or may be even months ago, I'd say that this is anything but certain. There are a lot of people and government through out the world who would like to see the U.S. weakened.
On Monday you can short every major company the downfall will be significant. This will be very interesting to watch the next world recession is on our doorsteps.
Money does not care who you are or what you do.
From Planet Money's blog, http://www.npr.org/blogs/money/2011/07/27/138738198/3-reason...
The full podcast, "Would a downgrade matter?", is an excellent listen: http://www.npr.org/blogs/money/2011/07/28/138721364/the-tues...
That's the problem. No one else knows either. Monday is not going to be a good day.
It's not a matter of how "people" treat it. Many funds are prohibited from holding anything other than AAA. Those folks will now be selling bonds.
For those that haven't looked at the math of bonds: When the price of a bond goes down (as it does when there are many sellers), the yield goes up. That yield is what the US Govt will be paying on future issued bonds, more or less.
Good luck to us all. We're gonna need it.
Yes it does.
> It sells bonds to remove dollars from the system.
No. The Fed is in charge of the money supply, and when they sell bonds, dollars are removed from the system.
The US Govt selling bonds actually increases various measures of the money supply.
No. It also refers to the bidding process when the US Govt goes to initiate the sale of bonds.
Regarding the rest: Yes, that is why I included "more or less" in my original post. The bidding for new bonds and the pricing of old bonds is quite close in most circumstances. (If they are not close, then there is usually trouble.)
> With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates.
Regardless of the details above, we both get to the same place.
Which funds cannot hold anything lower than AAA, and are they really big enough to dump enough US bonds to make a difference?
That type of downgrade is very unlikely
Besides, there's no new information released today, other than what some analysts at S&P think.
America, on the other hand, needs to borrow internationally.
http://belfercenter.ksg.harvard.edu/publication/20397/japans...
There isn't going to be a massive dumping of US bonds.
The AAA credit rating is helpful, but is only used by certain investors, and those big enough to make a real difference have their own assessors of risk.
I think the cutoff for the smaller guys to be legal to invest in is something like AA-. We aren't in danger of that. We'll probably be like AA+ or something.
Hopefully the US will quit spending so much on military and raise taxes on the ultra-rich to even things out, but who knows.
It's a fact - you don't tax your way out of a recession and you sure as hell don't tax people to create jobs. It simply doesn't work.
And yeah, great idea. Let's cut military funding while we're fighting a war on terror in three countries. Apparently you don't remember Clinton's military cuts which removed almost 300,000 people from the federal payroll. When you make military cuts, you're not just removing tanks and guns. You're also sending a lot of people to the unemployment line.
I agree that you should just run the short-term deficits. That said, if we have to cut short-term deficits (which I don't think is a wise strategy), it is significantly better to tax the rich than cut benefit programs.
Finally on military, I'd feel it'd be a better use of resources to transfer the 300,000 people to infrastructure projects. The ROI on the investment is much better than the wars where we have ground-troops.
No it's not. Wouldn't it be much better to not have to constantly pay billions to simply pay the debt's interest? We aren't even reducing the principal, which is why we have to keep raising the debt ceiling.
That's like saying it's perfectly fine to maintain a large credit card debt because you have a high income.
Just because you can handle it, doesn't make it wise.
http://moneyland.time.com/2011/07/15/the-u-s-is-not-drowning...
Yes, we should do what we can as a matter of course to pay down the national debt, but we really weren't any worse off in our ability to pay than we've been in decades.
At the very least, manufacturing a crisis out of the matter -- and this one was completely manufactured by the GOP -- that has resulted in making it harder to pay down the debt we already have was a completely daft move.
There is absolutely no need for the US to pay down inflation. GDP growth will naturally reduce the effective value of the principal. The problem is the run-away increase in the debt over GDP ratio that we've been seeing.
I even agree that I would not payoff 3% debt while I could earn higher elsewhere. However, the government isn't doing that. They aren't delaying payback so they can earn a higher rate somewhere else, they are delaying payback and spending the funds.
If it is a fact, where is the data?
Economies are stimulated by people spending money.
A tax cut to someone making 50,000 dollars a year is going to have a greater percentage of it spent than a tax cut to someone making 5,000,000 a year. Conversely, a 5-10% tax increase isn't going to drastically change the spending habits of someone making 5,000,000 a year, where as it might make the person making 50,000 a year cut back on a number of things.
The important part is that money finds its way back into the market. The rich have 90% of the money. It would make sense to either tax the rich and spend it on infrastructure (or stuff like scientific research and education). Or tax the rich and spend it on the poor (who will actually spend the money).
I hope we cut down on military spending because I think war is bad. We should stop having it. I can't imagine justifying fighting 3 wars on the basis of possible unemployment.
http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc
In short, the opposite/Hayekian view contends that taxation is seizure of resources from profitable/efficient entities and redistribution towards unprofitable/inefficient entities. We saw this in extremis in the bank bailout, and more controversially in microcosm with individual redistribution.
If you accept this -- that "profitable" correlates with "efficient", and conversely, though the correlation is not perfect -- then taxation is not a Robin Hood sort of thing that increases well being, but rather a move that ties the legs of the efficient sectors of the economy -- those that can post a profit even in tough times -- to those that are already underwater.
http://money.cnn.com/2008/01/29/news/economy/stimulus_analys...
My own wholly unfounded reasoning goes as this: give a broke guy some food stamps, he'll spend it on food. So the government is essentially buying this guy food. Food and groceries happen to be some of the the lowest-margin sectors of the economy - Safeway's operating margin hovers a little under 3%. So yeah, the guy will spend it right away, but you're not making much money out of this. The broke guy just wants to feed himself.
Give that same money to someone who's actively trying to make more money out of it (e.g, a business), they have much more incentive to use it efficiently.
I'm a SF liberal, I totally believe feeding the poor should have government support. But it makes a poor economic argument to me.
Safeway's doesn't have a huge margin, but so what? They employ people directly and indirectly: cashiers, truckers, stock clerks, people who work in canneries, farmers, chemists who formulate fertilizers, etc. It isn't as if a dollar spent at Safeway's ends up in an incinerator while a dollar spent at Apple mates with another dollar to make change.
Lets assume he is dirt poor, rather than broke. Everyone needs food and groceries. If he spends the food-stamps on food, he will likely spend the money that he would have spent on groceries on something else. By giving food stamps, you've given him a surplus of money, so he'll buy something that he needs but can do without, or a luxury good that he wants.
Lets assume now he is rich. We give him a tax break equivalent to the food-stamps (or even the same food stamps). He's already buying everything he wants and putting some in the bank. With the food stamps, he is able to put more in the bank. If the money is in the bank, it can be loaned to the poor guy, but it is actually (eventually) taking money out of the economy when it is loaned... the poor guy has to eventually pay it back to the bank with a few % interest.... it isn't actually getting 'spent' on anything.
Meanwhile if you give it to a more profitable business, they'll make much more out of it. We're not pissing around stimulus dollars to feed poor people or make them richer. We want to increase the total amount of value in the economy.
Your now-he-can-buy-luxuries argument is bullshit. Great, let the government subsidize iPads, that'll get the economy going.
If you take all the money (100%) from people who build and make things and give it to people who don't have jobs to spent, in the short term things will be bought and everything thing will appear stimulated. In the long run your entire economy will collapse as your capital base erodes. The basic Keynesian error is to not distinguish between purely consumptive (why don't create jobs to build ships, fill them full of gold and new technology, and then drive them into the Pacific and sink them?) and productive goods which actually build economic wealth and raise the standard of living.
Play Sim City and try to win. Check into the facts that Sim City was built upon.
> I hope we cut down on military spending because I think war is bad
All reasonable people think this. When the rest do then we will have autonomous world peace. Until then, we need peacemakers.
so, you don't tax people to sustain jobs, yet you don't cut jobs to lower spending. That is paradoxical.
There are a million ways to cut spending. Taking Obama's 2.5 TRILLION dollar "Obama Care" would be a great start. Take out his TRILLION dollar stimulus which was an epic failure and guess what? You just saved 3.5 TRILLION dollars without cutting any jobs.
I know it's obvious but... It's not obvious. What if those tax dollars were reinvested in universal health care? A small business wouldn't have to incur the cost of insuring its full-time employees. That would help stimulate growth, as it would cost less to hire each employee.
The premise that your argument stems from--lower taxes means more jobs--has been, time and time again, false in practice. Trickle-down economics are theoretically sound, but in 30 years of attempted trickle, nothing statistically significant has come down.
http://www.occ.treas.gov/news-issuances/news-releases/2011/n...
see quote from Senate minority leader below
From http://www.washingtonpost.com/politics/in-debt-deal-the-triu...
But at the Capitol, behind the four doors and the three receptionists and the police guard, McConnell said he could imagine doing this again. "I think some of our members may have thought the default issue was a hostage you might take a chance at shooting," he said. "Most of us didn’t think that. What we did learn is this - it’s a hostage that’s worth ransoming. And it focuses the Congress on something that must be done."
[edit]: Interesting to see all the downvotes, but my comment had a direct quote from the GOP senate leader. Can anyone explain why they downvoted it.
As for temphn's point below. Has any Nobel laureate defended the "hostage taking" ?
Congress already controls both spending and taxation. So they can start fixing the deficit problem by cutting down on pork, cutting tax loopholes etc. Threatening to force a default is not the answer.
And the investors who are actually buying US debt don't rely on ratings agencies to give them guidance, and do in fact have expertise in-house to evaluate these things.
As has been mentioned elsewhere on this thread, institutional investors don't treat US bonds like any other, subject to triggers and rules like AAA-only. It's an exceptional case that is treated differently than the others, and one rating agency's opinion is not going to make as big an impact as people seem to think.
It comes down to this: where else would they put their money?
"so they rely on companies like S&P and Moody's to give them guidance."
And those companies fabricate data and sell it to them.
Perhaps not everyone should invest in areas where they have no possibility of understanding the risks.
You just managed to sum up the vast majority of economics problems. Humans are dumb though. Not much you can do.
[1] http://en.wikipedia.org/wiki/Credit_rating_agencies#CRA_busi...
As another comment on this thread pointed out, if the sole maker of the world reserve currency cannot keep a AAA rating, then who really deserves it? As the recent budget fight showed, the US government cannot make more than token attempts to improve its finances. The current debt is about one-fifth of the annual world GDP. Well-nigh invincible power blocs guard the biggest line-items on the budget. Tax increases are off the table and of doubtful effectiveness in this economy even if they were passed.
What confidence should such a government inspire?
A sell-off of bonds would make it more expensive for the government to borrow money, which would further accelerate the expansion of the deficit. The deficit is the primary driver of the downgrade, so an acceleration would trigger further downgrades.
I am admittedly learning much of this as I read, but it seems to me that a large concern would be the amount of money that might simply shift out of our economy to economies with better (safer) credit ratings.
I think that is largely why this won't have that much of an effect, there isn't a replacement for that much money that is AAA. The "cure" (crowding into what is left) would be more painful to the bond market than the "disease" (us).
The credit rating agencies (S&P, Moody's and Fitch) don't know what they are doing! They enabled the financial meltdown. Their ratings are not useful. Their numbers are bad. They are either corrupt, inaccurate or both.
It would be nice and easy to believe that, since S&P puts a "AAA" beside a company's name, that the company is solid. We now know that is false.
Pay attention to Nicholas Taleb's writings: the financial models commonly in use don't work - don't trust them. Use more conservative measures. Avoid markets where you cannot quantify risk.
We can all lipsync this tune.
Based on the slim case studies we have so far, the S&P downgrade of Japan in 2002 had approximately zero impact on Japanese bond rates. It doesn't even show up as a small blip on the 10-year graph; was just completely ignored.
http://cache.boston.com/bonzai-fba/Globe_Graphic/2011/07/31/...
[EDIT] Sorry, read the original statement wrong. I was thinking the parent said 70% was held foreign, not vice-versa.
Their hesitation is they wouldn't get all their money back. If China pulled even 25% of its investments out of the U.S. the dollar would free fall. They wouldn't be able to cash out before most of the dollars value was inflated away.
China continues to buy our debt because they don't want the value of their current investment to collapse
That's not going to happen.
Plus S&P's logic is shaky on this. The whole reason the threat of S&P dropping our rating has had no impact is because their demands were impossible to achieve. Cut $4 trillion from the budget in 10 years when we're expected to add $9 trillion in the next 4? Not possible and everyone knows it.
Imagine if we actually passed the balanced budget amendment back in 1997 - things would be a LOT different.
The big leap is from "investment grade" securities to "junk bonds" ('BB'/'Ba' or less). We're still a long way from there.
Even as we speak the Euro is breaking apart. Europeans are pouring billions of dollars into U.S. currency, bonds and investments even at a loss, even after the S&P downgrade. Yesterday Bank Of New York Mellon told depositors that they would only accept investment if the investor accepted a _negative_ interest rate!
http://www.24hgold.com/english/news-gold-silver-bank-of-new-...
Why?
Because things are worse in Europe! The Greece financial crisis is ripping the Euro apart. The U.S. remains the best haven in a lousy neighborhood (the world): better than Europe, better than China, better than Asia.
We should obliterate S&P, Fitch and Moody's for their financial crimes during the financial meltdown. More trustworthy firms will rise to replace them. Meanwhile investors will become appropriately wary of investing in financial instruments about which they know nothing.
EDIT: This seems to sum it up: http://lostechies.com/johnpetersen/2011/07/16/the-impact-of-...
While the {S&P, Moodys, Fitch} sub-prime department obviously got completely ahead of itself modelling-wise, the corporate and sovereign departments have a lot of credibility : partly because they haven't been trying to assign values to 'a whole new way of doing things (this time it's different, etc)'.
"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. "
http://tpmdc.talkingpointsmemo.com/2011/08/gop-tries-to-shif...
sigh
I'm not a partisan-- George Bush's runaway spending contributed a great deal to the current predicament. But the basic Congressional oversight and operating under a budget hasn't happened the last couple of years.
Uh, you are merely parroting inaccurate GOP talking points, and I think we can be a little more accurate than that here.
First of all, the House and Senate easily passed Obama’s first budget on the president’s 100th day in office. That budget measure, however, did not include a single GOP vote, a harbinger of the lack of bipartisanship to come. From 2009 to January 2011, Republicans forced more than 90 “cloture” votes, which require 60 senators to agree to limit debate (ie stop a filibuster) on a measure.
Pretending that there was no Democrat "budget plan" for 2010 is disingenuous at best. Ongoing Democrat "plans" were continuously on the docket:
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=11...
Democrats did not have anything like a filibuster-proof majority in the Senate, and Republican Senators were quite open with their threat to filibuster any legislation until the “Bush-tax cuts” were extended.
http://www.nationaljournal.com/congress/gop-will-filibuster-...
"We write to inform you that we will not agree to invoke cloture on the motion to proceed to any legislative item until the Senate has acted to fund the government and we have prevented the tax increase that is currently awaiting all American taxpayers,” said the letter, which was sent to Senate Majority Leader Harry Reid this morning."
“The true effect of this letter is to prevent the Senate from acting on many important issues that have bipartisan support,” Reid said this morning on the Senate floor. He said the letter codifies a GOP strategy of delaying action “on critical matters, then blaming the Democrats for not addressing the needs of the American people. Very cynical, but very obvious, very transparent.”
And imagine that, here we are in 2011....
Of course, filibuster has been used by both parties, but these tactics by Republicans accelerated drastically when Dems took over Congress late in Bush's presidency. As even the conservative American Enterprise Institute noted, Republican filibusters were used increasingly to obstruct legislation:
http://tpmdc.talkingpointsmemo.com/2010/01/the-rise-of-clotu...
"It is the most striking in history," American Enterprise Institute resident scholar Norm Ornstein told TPM.
"What happened, Ornstein says, is that during the last two years of President George W. Bush's second term, Republicans offered "no initiatives to speak of."
"The initiatives were coming from the Democrats, and the Republicans wanted to kill 'em, or slow things down. Republican filibuster threats, Ornstein said, were "like throwing molasses in the road."
"Still, Ornstein largely attributes the stark rise in cloture motions in the 110th Congress to Republican delay and obstruction tactics."
http://krugman.blogs.nytimes.com/2011/08/05/sp-and-the-usa/
TLDR:
1) The 'madness of the right' holding the debt-ceiling hostage cost us the confidence of investors (and S&P).
2) The ratings agencies have shown they aren't qualified to rate anything, much less sovereign debt.
3) S&P miscalculated the downgrade by $2T before going ahead with it anyway.
4) S&P's magic number for averting a downgrade was $4T deficit reduction over the next decade. The Congressional deal failed to reach that, but according to Krugman that number is barely relevant to the US debt costs and should not effect the credit rating. The real downgrade risk is with long-term unfunded healthcare liabilities, which S&P seems to have ignored here.
A quote: "The outlook on the new U.S. credit rating is negative, S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months."
I.e., things are going to get a lot worse before they get worse.
Time to bring this back to a hacker's perspective. Is there any way to "hack" the system so as to get government finances to within commuting distance of sanity? Or have recent events already answered that question?
As far as reducing the deficit goes, I have less insight into this. Except that making the Federal government's budget revenue-neutral is a critical first step.
> as reducing the deficit goes, I have less insight into this
Balancing the budget is exactly reducing the deficit. It's the debt I suspect you have less insight into.
Frankly it's an embarrassment that they could only agree lower the deficit by less than 10%. They are a long way from addressing the debt.
It would be funny, if it were not so serious: a lot of my conservative friends harp on the need to stay in the middle east, but refuse to pay for it with taxes.
http://www.editedforclarity.com/2011/08/01/debt-ceiling-deal...
Whether you believe FDR's New Deal helped or hindered recovery from the Great Depression, the simple, business-oriented financials of it would seem to indicate that right now is the time to be building roads, trains, dams, nuclear plants, etc.
Instead, we cut funding to things which may pay off later in order to funnel money into which have an inevitable negative rate of return, like imprisoning people, security theater, and killing people on the other side of the globe.
We're not paying it back. Any of it. At best we can cover the interest payments.
Why do you think this won't blow up in our faces?
The reality is that demand-side economics has stronger and more intelligent underpinnings (give money to individuals --> they spend --> increase demand --> hiring). Giving more cash to companies doesn't induce hiring; demand for products induces hiring.
It doesn't matter if borrowing and spending (some might call it "investing") money is good fiscal policy— "spending" is just wrong.
Please. The government spent far less during Clinton's administration (the last vaguely fiscally responsible president), and I don't recall having to step over that many starving homeless people to get to work.
Put their controlling officers in jail and shut down the companies forever.
http://www.housingwire.com/2011/04/14/credit-ratings-agencie...
http://www.huffingtonpost.com/2011/04/13/credit-rating-agenc...
I am actually sympathetic to some debt forgiveness - it is not the people in need that I am pissed off at. Anyway, it is a mess, and everyone who is worth less than many millions of dollars is going to feel some pain.
I expected this economic collapse to happen after the 2030s - suddenly, after a few years of W. Bush's presidency I realized that the grand plan was to cause the collapse to happen much sooner.
Well, it takes money from lenders (or cash holders) and gives it to debtors. If you don't like that, stop being a lender or cash holder: move out of cash and bonds into, say, stocks, commodities, or real estate. If you're really confident that that inflation is going to happen, go short cash: build up a huge credit card balance at the current low interest rate, while pouring all of your earnings into non-cash holdings. (Danger: if you go short and you're wrong, you're fucked.)
You bought gold, which conserves your wealth ... and the government takes 15% to 50% of your "profit" (depending on your circumstances). Debasing by the fed together with the tax systems guarantees there's nothing you can do against it.
No new taxes. No new jobs. I can't believe that folks who are in their 20s and 30s aren't throwing rocks at people my age (late 50s) for our generational greediness.
By the way, I had a six figure federal tax bill one year, when my cofounders and I sold a startup. Maybe I'm an aberration, but I was proud to be able to chip in that much to the government that paid for ARPA back in the day.
The United States produces so much more in terms of GDP than the next largest nations that it's a stretch to compare them. I think the fact that we produce more than 2X what the next largest single nation produces means that debt may function differently for us. The global economy is complex enough that relative position can mean more than short term profit and loss.
Debt is a bad thing. But the debt ceiling we just fought over extending represents 1 year of USD GDP. In everyday terms, someone expected to make $100k per year being $100k in debt. To me that sounds more like a student loan than a national crisis.
Should we make changes, cut spending and increase revenue? Sure. But we should also keep the bigger picture in mind, and look at our debt as it fits into the context of a global economy.
I do not think that is directly because of GDP, though. It is because of the size of the US bond market. If you want to buy or sell US bonds, you can easier find a seller or buyer, the larger the market.
That is why people think Euro bonds (bonds issued by the EU, not by individual EU nations) would benefit even the financially stronger nations. They would create a huge market, and gain interest benefits from it.
Since part of the reasoning of S&P was that US politicians were willing to play chicken with events of default, I don't see that this is an easy hole for the US to dig out of. The fact that politicians in the US were openly discussing 'how bad would a default really be' sums up why the AAA rating was no longer deserved.
IMHO, 80% likely that the other agencies will follow within a couple of weeks.
Did anyone else see that come through? Is NYT just behind a little?
If a ratings agency feels that it's necessary to use scare tactics, that's scary enough in itself.
After all, Sterling used to be the world's reserve currency : things change.
To me it seems a little ridiculous that the US and these countries shared the same rating for such a long time. On the other hand, there are AAA countries like UK, France, Germany that do not seem to fit into the same category either.
I have no real opinion if the US deserves the AAA rating, but thinking treasuries are the safest investment in the world seems a bit optimistic.
And the fact that moody's still maintains Aaa means that there's a nonzero chance it will have no effect. I hope.
At the moment, the national "debt" is over $10 trillion dollars, while the total supply of currency is about $2 trillion, and total government profits are about negative $1.5 trillion. If we assume that the government will not use it's powers as fiat-currency-creator to back the national debt, than the proper credit rating of the U.S. is F. There is no way it could possibly pay back the debt. The debt is five times greater than the total supply of dollars. It's debt to profits ratio is way worse than many bankrupt companies. On the other hand, if we assume that the government will continue to use its power of fiat to back the debt, then the rating is AAA. It's safer in nominal terms than any other sort of debt. It is the baseline, the reference point. No other dollar-denominated debt can possibly be safer.
So you have two possibilities for the U.S. "debt" - AAA or F. Rating it anything else just demonstrates extraordinary ignorance.
That said, I agree these ratings don't have much basis in reality. As others have commented, look at how S&P and similar organizations rated subprime debt. They're part of the Wall Street club. They might nibble a bit on the hand that feeds them for political reasons, but they certainly aren't going to bite it off.
It's pretty clear that a AA+ rating for US debt is as much of a joke as AAA. The token 'downgrade' gesture just adds to the absurdity.
See my post here for a more in depth explanation: http://intellectual-detox.com/why-the-national-debt-is-non-p...
It doesn't matter if you're "willing" to pay more for things or not. If the Fed monetizes debt, more money enters the system, there are more dollars bidding for the same amount of goods, prices rise, and creditors will get less for their money. Simple supply and demand.
If you were right, the Fed could just write checks for the whole $14.5 trillion debt in one go and we'd have a balanced budget overnight. Do you think that would be a good idea? Hell, why not create a quadrillion or two more on top of that and make us all millionaires??
Fractional-reserve banking might be a good topic to review. It is entirely possible for more debt than currency to exist. Suppose you deposit $100 at a bank, which lends $80 of it to Alice. She deposits her $80 in another bank which lends $60 to Bob. So that's a perfectly legit scenario where more debt ($140) exists than currency ($100). And it doesn't mean that the debt can never be paid back.
> So you have two possibilities for the U.S. "debt" - AAA or F. Rating it anything else just demonstrates extraordinary ignorance.
Did you just call the entirety of Standard & Poor's, a leading financial firm for over 150 years, extraordinarily ignorant? What basis can you demonstrate that you understand the world and national economies and credit markets better than a few thousand really smart economists? There certainly does exist a spectrum between being the safest investment in the world and currently actually in default (which is what an F actually means.)
That said, it's true that S&P changing their rating doesn't have much concrete meaning. S&P didn't actually make the government any weaker than yesterday. Nobody knows what's going to happen next. S&P is guessing like the rest of us, although the guess is built on the strength of some very sophisticated financial models and analytical tools.
The only reason fractional reserve works now is because there is an FDIC and Federal Reserve who will create new money any time there is excessive demand for people to convert deposits into cash. Fractional reserve only works because of the fiat powers of the government. So my point stands - if you assume the U.S. is using its fiat powers, then the debt is AAA. If you assume the U.S. is not using its fiat powers, then the U.S. should have the debt rating of an over-leveraged, 1929 private bank - ie, extremely low.
Did you just call the entirety of Standard & Poor's, a leading financial firm for over 150 years, extraordinarily ignorant?
Yes I did. And why shouldn't I? Maybe the S&P was glorious a hundred years ago. But the last few years their track record has been dismal. See for reference the entire subprime fiasco.
What basis can you demonstrate that you understand the world and national economies and credit markets better than a few thousand really smart economists?
All I have his my own brain, and my use of reason, logic and evidence. You either buy my arguments or you don't. If you're not willing to use your own reason, and base your views entirely on appeals to authority, then there really is not any point in further discussion.
If you wish to see my arguments laid out in further detail, I do have a blog. Here are some general thoughts on the economy: http://intellectual-detox.com/assorted-thoughts-on-the-econo... It's only been nine months since I posted that article, but so far my predictions have been spot on.
Here is a post I wrote about the national debt: http://intellectual-detox.com/why-the-national-debt-is-non-p...
OK, let's take the financial crisis, where S&P, Moody's, and Fitch rated thousands of CDOs as AAA. In return for the fabricated ratings, S&P et al received billions of dollars. Years later, the credit rating firms downgraded all those CDOs and they went belly up.
The credit rating firms have been under investigation for years now and the Senate has called for criminal investigations by DOJ. Its time your "smart economists" took a perp walk.
These firms should be smashed by the SEC and their officers branded on their foreheads with a giant letter "E". There are other more reliable companies in the industry that will rise to replace them. They have caused the loss of so much money, they have misled so many, they would not be missed.
again the same group that rated a bunch of debt AAA when it was junk. what is their motivation?
Says it all.
Government's Financial Condition http://www.youtube.com/watch?v=LOiw5aBrm4Y
(Khan was a Hedge fund analyst)
Phases of political maturity:
1) Apathy. Political parties are like football teams. You pick one and they're your guys. You root for them no matter what. If anything, there might be something wrong about folks who take these things too seriously.
2) Emotion. The other political party is the devil. They are out to destroy America.
3) Enlightenment. The other party is just full of people like me. There are some smart folks, but the problem is that they have all the wrong incentives and conclusions.
4) Understanding. Gee, there are those same bad conclusions and wrong incentives in my favorite party too. Ergo, parties don't matter. There are smart people everywhere. When the system fails, it's a problem of the system, not of the people or parties.
The problem in the U.S. is that the majority of folks are in stage 1 or 2 when we need them to be in 4. So when deep structural conversations come along, they're still either rooting for their team or blaming the other guys, when they should be talking about principles that need to be changed for the entire system to work better, no matter what the actual goals of any party.
There is another problem that helps create deadlock -- an understanding of where the money comes from. I think many folks view the economy as something the government grows so that it can harvest money in the form of taxes. (This is not a Keynesian discussion, simply a discussion about taxes in general.) Other folks view the government as something the economy grows in order to keep it functioning. These are two deeply conflicting world-views. I'm not sure you'll ever reconcile them. Some put trading first and sharing second. Many put sharing first and trading second. These two camps have come to demonize the others, sadly. (Which takes us back to the observation above)
For this problem to be solved, we need to give up on arguing specific issues or philosophical positions and instead talk about fixing structures so that the budget stays balanced long-term no matter who is in power or what their priorities are. This is a meta conversation, the kind the framers had. I am very doubtful there is anyone around today in power that can handle it. Not a happy outlook. All of the people in political power got that way by playing ideological and rhetorical games and by being fiercely loyal to their party. It's the exact opposite qualifications for folks that would have a chance at actually solving anything.
I think we could talk forever and reach general agreement informally on all number of things, but if the system remains broken, it's all going to be for nothing, sadly. Without an honest look at meta systemic issues, a free-for-all discussion around U.S. policy is all so much activity without results.
0) Withdrawal. No political party represents me, and the ones in existence represent other groups. There's nothing I can do to change the system, and it's not even worthwhile voting. I'm going to watch Jersey Shore.
In most Western countries, there's a lot of people in stage 0. It's a problem for any putative democracy.
People should really make some radical improvements to the way economy and finance system work. The main things: it should be simplified and transparent.
If only a few experts understand what happens how could the system be reliable and secure? Everyone also knows that the more complicated is the system the higher is the failure rate.
Would you rather fly in a 747, or something from 100 years ago? The latter is far, far simpler and easily understood by non-experts.
http://youropenbook.org/?q=AAA+obama&gender=any
http://youropenbook.org/?q=aaa+republicans&gender=any
http://youropenbook.org/?q=aaa+democrats&gender=any
http://youropenbook.org/?q=AAA+tea+party&gender=any
http://youropenbook.org/?q=aaa+congress&gender=any
http://youropenbook.org/?q=aaa+politicians&gender=any
I have my own opinions as to who's responsible and what amger is well placed, but I think one can draw their own conclusions.
Yes I know these are a limited sample set of people who have set their profiles to public. But still...
It's about time somebody brought down the cluebat.
The reason the European debt crises is so serious is because the adoption of the euro means that no individual contry can print their own money to avoid default.
It's more because each individual country issues bonds. The ECB can't issue debt.
I am not so sure most Americans are ready for what the world will be like when it happens, because unless the need for a regular deficit is reduced and reliance for imported oil curbed, it will be very painful indeed.
http://en.wikipedia.org/wiki/List_of_countries_by_credit_rat...
"Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act."
I mean, I am not a conspiracy theorist by any stretch of the imagination, but I just never imagined that they would be able to pull the trigger.
All it takes is some 'investigation' by the US Treasury into S&P and that's it....game over. Not that I think the US Treasury will retaliate....but WOW. I never thought they would take this step.
Good for them.
Double-dip recession, here we come.
http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SP...
I don't think that was their primary goal but their name is now going to be mentioned on every newscast and in every paper everywhere for weeks.
TL;DR - "I'm not sure it will have any impact. When you look at the bond market — 10-year U.S. Treasuries, for example — where is it today? In the light of all this hype about debt ceilings and possible defaults, it's at 2.93 today, so this is an extremely low interest rate in both nominal and real terms. It means that everyone in the world is willing to hold these bonds and is not the least bit worried about the possibility of a default. So, investors haven't changed their view of the creditworthiness of the United States at all, and I don't think they're likely to in the foreseeable future." -Mark Weisbrot, co-director of the Center for Economic and Policy Research
A downgrade, even if the markets don't raise Yields, can be catastrophic because many financial institutions (mutual funds, insurance companies, unit trusts, etc.) can only hold AAA rated securities in their portfolios - and some central banks can only hold AAA rated securities as collateral in some situations.
So, legally, they will not be able to hold on to American gov't debt, even if they wanted to. The mere fact that a ton of people will be flooding the market with debt, will push up yields and that will lead to other catastrophic consequences.
I expect that the Fed will buy a ton of bonds to push down yields and keep the Treasuries Interest costs low - but they will have to print a ton of money to do that....which will lead to inflation, which leads to higher yields which leads to higher interest costs, and creates a crazy cycle.
You get the idea.
However, that's just theory - in a perfectly balanced global economy that's not fragile. In this global economy, I suspect that there might be a concerted effort to loosen standards to prevent a mass exodus out of US Treasuries, but at least this sends a strong signal that the ratings agencies are serious.
They do account for multiple ratings agencies having different opinions.
- 1.6 Trillion budget deficit
- 14 Trillion national debt
- 55 Trillion US total debt
- 115 Trillion Unfunded liabilities
- 17% U6 unemployment
- 45.8 Million Americans on Food Stamps
- 52 Million Americans without health insurance
- 1/2 of mortgages are underwater
- 63% labor participation rate, lowest since early 80s
- -5% in Real medium household income in the last 10 years
- 25% of US households have zero or negative net worth
- 1 out of every 45 households was hit with foreclosure
- average length of unemployment is now 40 weeks
On Thursday evening, the economist talking-heads expressed some confusion about what was driving that sell-off on that particular day. There was vague talk of problems in Europe, although there has been worse news out of the Eurozone for months without that kind of drop.
On Friday, we get the S & P announcement of a decision that may impact markets. One can only imagine when this particular decision was actually made.
What drove the sell-off on Thursday?
or
The rich is alerted the downgrade first, naturally.
So your upside would essentially have to be a huge amount of money, but of course you're much more likely to get caught if you're moving around such a large sum.