04/18/11 Baltimore, Maryland – Sniffing the obvious, Standard & Poor’s cut its outlook for US sovereign debt from stable to negative this morning.
“We believe,” reads a statement released with the announcement, “there is at least a one-in-three likelihood that we could lower our long-term rating on the US within two years.”
As we type, the Dow is down more than 200 points. The S&P hangs by its fingernails to 1,300. And the yield on a 10-year Treasury has inched its way to 3.44%
For the record… or, should we say, for what it’s worth… S&P still considers US debt AAA.
Given the fact the US government is 28 days away from bumping up against the $14.3 trillion debt ceiling, we suspect the question of Uncle Sam’s ability, let alone political will, to pay is too obvious to ignore.
The current White House budget plan requires lifting the ceiling to $20.8 trillion by 2016. Wisconsin Rep. Paul Ryan’s plan, passed by the House on Friday, would require a ceiling of $19.5 trillion, according to figures compiled by Bloomberg.
Alas, “we believe there is a material risk,” S&P warns, “that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013.
“If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”
Unfortunately, in the world of late, degenerate capitalism, that’s about as strongly worded as these statements ever get.
Standard & Poor’s continued to rate a host of mortgage-backed securities AAA right up to the point when they detonated in 2007-08.
“A huge part of the reason the US is in its awful financial position,” writes our friend Barry Ritholtz, author of Bailout Nation, this morning, “is due to the fine work of S&P. The ‘negative outlook’ of US debt has come about because of the inability of Standard & Poor’s to have performed their jobs rating mortgage-backed securities.
“Ultimately, this enabled the entire crisis, financial collapse, enormous budget deficit and now political [squabble] over the debt ceiling.”
Of all the AAA-rated subprime MBS issued in 2006, 93% are now junk. Barry will be joining us in Vancouver again this year. Will we be seeing you there?
Of course, on the S&P news this morning, in a move only our Abe Cofnas could pretend to understand, the dollar is rallying. In fact, at 75.4, the dollar index is the strongest it’s been for more than a week.
Oy. Chalk it up to an even uglier horse in the glue factory: the euro.
Addison Wiggin
for The Daily Reckoning
Addison Wiggin
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
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prepare prepare prepare – this will get worse before it gets better.
Lift the debt ceiling $500 billion at a time, cutting departments each time, EPA, Dept of Education, HUD, Commerce, SBA etc. Sell Freddie, Sallie, and Fannie. Sell leases for oil and natural gas. Sell federal land. Keep shrinking until the deficit is zero. A crisis is a terrible thing to waste.
At the same time there were rumours of Greece going into restructuring! Among the blind the one-eyed is king!
Bennet Cicil’s suggestion has merit. Using the current 3.6 trillion as a base-line let’s cut $180-billion (5%) a year, until the books balance (or at least GDP is growing at a faster rate than the national-debt).
Reducing the size of the federal-government by 5% a year would result in a smooth glide-path (as compared to an abrubt drop). Gov’t agencies could down-size personnel through a combination of normal attrition and “early-outs,” early retirment packages. –my $0.02
Cut the Pentagon budget in half.
Raise taxes on the rich to what they were under Ronald Raygun or Billie Clinton.