Moody’s announcement on Tuesday that it would retain its AAA rating of U.S. government sovereign debt as a result of the debt-limit agreement came with a warning: The government must rein in spending or risk a downgrade anyway. The deal “virtually eliminated the risk of [a] default,” but the agency warned that “Should the new mechanism put in place by the Budget Control Act prove ineffective, this could affect the rating negatively.” Moody’s added that it wanted to see the United States lower its debt-to-GDP ratio, now approaching 100 percent, to around 73 percent by 2015, and then gradually move the ratio lower.
Credit rating agencies like Moody’s issue opinions as to the credit worthiness of debt issued by various entities including governments, with 'credit worthiness” being defined as the ability to pay interest on and ultimately pay back the debt. Those ratings directly affect the interest rates offered in the issuance of that debt, and changes in a credit rating will impact the market value of the debt before it is retired.
While discussing socialism on a talk show recently, I was confronted with the question: If “capitalism” is so great, why has it failed? Of course, ever since our financial crisis hit, this query has become all too common.
Now, after informing the host that I avoid the word “capitalism” — as it was originated by a communist — and instead prefer “Natural Economy,” I stated the obvious: Blaming our problems on the Natural Economy is like blaming airplane crashes on auto design. After all, there is a reason why Rogers Holdings CEO Jim Rogers said in 2008 that the United States was now “more communist than China.” With thousands of laws, regulations, and mandates and a multitude of bureaucracies that stifle the private sector, our system can hardly be called a Natural Economy. But more on that later. This issue is better illuminated by examining a truth hiding in plain sight.
The compromise bill that emerged Sunday night from behind closed doors is being loudly trumpeted in an attempt to persuade recalcitrant conservatives in both houses to vote for something — anything — in time to avoid the August 2 deadline.
A careful analysis of the ultimate compromise bill yields some important conclusions. First of all, there is nothing in the law or statutes that states categorically that the nation will default if the August 2 deadline isn’t met. This is merely a “best estimate” by Treasury Secretary Timothy Geithner as to when he will run out of options to continuing paying the government’s bills by “borrowing” from various pots of money such as the federal government employees’ retirement plan. If he is able to do that, it’s unclear why he would run out of other options automatically on the 2nd.
Despite the back-patting that many Congressmen are giving themselves as a result of the so-called Budget Control Act of 2011, former U.S. Comptroller General David Walker contends that the United States is still only three years away from becoming Greece. Walker told CNBC, “We are less than three years away from where Greece had its debt crisis as to where they were from debt to GDP.”
Walker’s assertions are similar to those made by GOP presidential contender Ron Paul in June, who predicts that the status of the United States dollar as the reserve currency of the world will end sooner than 25 years and that America is soon to face a financial crisis significantly worse than that of 2008.
The debt ceiling is to rise initially by $900 billion under the Revised Budget Control Act of 2011. And then, the debt limit is to rise again by either $1.2 trillion or $1.5 trillion depending upon how successful the 12-member Joint Committee of Congress is in finding sufficient cuts in government spending to avoid a “trigger” that would do the cutting automatically. The committee will be made up of three Republicans and three Democrats from each chamber.
Those “deficit reductions” will be found and presented to Congress by the day before Thanksgiving, and then voted on, “up or down” with no amendments allowed, by both the House and the Senate, by December 23. If no agreement is reached by the committee, or if their bill fails in Congress, then budget cuts will be implemented automatically. Chances that the committee would choose “deficit reductions” in the form of tax increases are slim, according to House Speaker John Boehner:
President Obama signed the Budget Control Act of 2011 on August 2, just hours after the U.S. Senate approved the measure, which would raise the debt limit as much as $2.4 trillion. Obama then launched into a public and phony political attack against the same tax "loopholes" that the White House website is promoting for energy companies.
The Budget Control Act of 2011 would trim about $900 billion of an expected $7-8 trillion in projected deficit spending increases over the next 10 years and set up a 12-member super-committee of Congress charged with finding an additional $1.5 trillion in savings. The so-called "Super Congress" would be authorized to find spending cuts or tax increases, and its findings would be fast-tracked through Congress (i.e., voted on without amendment and limited debate). The bill wouldn't actually cut any spending in an absolute sense; spending would continue to increase. But the bill would trim projected future spending increases.
It feels like we’re dealing with an Amy Winehouse form of governing. “These overdoses happen because these guys drink 20 beers and then reach for their heroin,” a friend of mine said after the late star’s recent death, at 27. “You can’t think straight once you’re totally blitzed.”
It seems the same with our politicians, overdosed on their own importance. Their non-straight thinking and out-of-control spending has already put us $14.3 trillion in the hole at the federal level, not counting the tens of trillions in unfunded entitlement liabilities, and they’re still racking up $4 billion per day in new red ink.
Even with the new debt deal to supposedly cut $2 trillion or $3 trillion in federal spending over the next 10 years (a cut in projected future spending, not a cut in the absolute sense), the national debt would still firmly be on a trajectory to increase by another $8 trillion to $10 trillion over the coming decade.
What does it take to be able to own and operate a taxi and earn $30,000, $40,000 or more a year? You need to purchase a used car and liability insurance. Compared with other businesses, the startup cost to become a taxi owner/operator is modest; that's until you have to come up with money for a license. In May 2010, the price of a license, called a medallion, to own one taxi in New York City sold for $603,000. As referenced in my recent book, Race and Economics, New York City is not alone. In Chicago, a taxi license costs $56,000, Boston $285,000, and Philadelphia $75,000. It's not rocket science to understand the effect of laws that produce these prices: They discriminate against anyone getting into the taxi business who lacks tens and hundreds of thousands of dollars or bank credit to be able to get a loan.
If there were a contest for the most misleading words used in politics, "poverty" should be one of the leading contenders for that title.
Each of us may have his own idea of what poverty means -- especially those of us who grew up in poverty. But what poverty means politically and in the media is whatever the people who collect statistics choose to define as poverty.
This is not just a question of semantics. The whole future of the welfare state depends on how poverty is defined. "The poor" are the human shields behind whom advocates of ever bigger spending for ever bigger government advance toward their goal.
In voting to hike the federal debt limit, Republicans in Congress have violated more than one of their campaign promises. One of the vows they broke was articulated in the House Republicans’ 2010 “Pledge to America” under the heading “Our Plan to Restore Trust”: “We will ensure that bills are debated and discussed in the public square by publishing the text online for at least three days before coming up for a vote in the House of Representatives.”
The laughably named Budget Control Act of 2011, which raises the debt ceiling in exchange for minor (and mostly future) spending cuts, was posted on the House Rules Committee website on August 1 at 1:45 a.m. The House voted on and passed the bill later that same day. Not even 24 hours — let alone the three days promised in the “Pledge to America” — had passed between the posting of the bill and the vote.