Moody's Just Threatened To Slash The US Credit Rating

[bigfootedfred]

Moody's is out with a comment saying that if there's no imminent progress on the debt ceiling fight, the US credit rating will be cut.
This makes total sense, and we applaud Moody's for doing their job: Identifying an imminent (real) issue, and sensibly advising (ahead of time) about what could be a threat to US debt holders.

http://www.businessinsider.com/moody...#ixzz1O8vRUoat

also




Moody’s warns US government on possible downgrade if no progress is made on debt ceiling


http://www.washingtonpost.com/busine...THH_story.html

ok so...that does not sound good. Seems the 'recovery' from the cash injections, is finding its foundations rather insecure..

This is a much wider issue than simply the title, so im not going to attempt to steer the debate or set the tone.
I leave it to you.

[Principe Alessandro]

There is at least one state on earth that isn't going bankrupt soon or later?

[Ishoss]

There is at least one state on earth that isn't going bankrupt soon or later?

Norway was declared safe by some international agency not long ago. Slow and steady...

[boofhead]

There is at least one state on earth that isn't going bankrupt soon or later?

Australia.

[Jedi1]

Somalia, their government wasn't physically capable of getting in debt by virtue of not existing as an effective entity.

[charles the hammer]

Wasnt this threat issued earlier? I remember having a thread on it.

[Sphere]

“The heightened polarization over the debt limit has increased the odds of a short-lived default” by the government, the rating agency said. “If this situation remains unchanged in coming weeks, Moody’s will place the rating under review.”

I too am worried that the US will be forced into a short-lived default due to the current politics in Washington.

Though from a fiscal standpoint it is a very silly thing to let happen. Keeping the US borrowing rate low is a far better money saver than any possible policy change between now and the election. It is perfectly clear no long term deficit reduction plan is happening until after the 2012 election, it wouldn't make political sense for either side because

a.) the Republicans are hoping to take the Whitehouse and thus have no reason to cut a deal with a Democratic president now. Especially since compromise and moderation are liabilities for Republican congressmen/senators these days

b.) The Democrats are hoping to retain the Whitehouse and have an Obama/Democratic mandate to enact budget reform according a Democratic vision (i.e. tax increases, extra defense cutting, limited entitlement cutting), and are content to just make political hay as defenders of SS, Medicare etc. until then.

[Dalarna3]

I remember hearing about this a while ago... nothing new, is my guess.

[GrnEyedDvl]

I remember hearing about this a while ago... nothing new, is my guess.

Your memory is a bit off this time. Standard & Poor lowered the long term debt rating 2 months ago but it had nothing to do with the debt ceiling.

[Dalarna3]

Your memory is a bit off this time. Standard & Poor lowered the long term debt rating 2 months ago but it had nothing to do with the debt ceiling.

Ah, yes, I do believe that my memory was a bit off this time.

[Big War Bird]

What does the US government need a good credit rating for if it is legally prevented from borrowing?

[Freddie]

What does the US government need a good credit rating for if it is legally prevented from borrowing?

I think you will find the US governments spending is heavily supported by borrowed debt the majority of which is either bonds or foreign debt. The problem for Obama is if the credit ratting is cut then borrowing money suddenly becomes more expensive which means more income goes on paying debt interest which means he has to borrow more to keep up spending or he starts cutting. At this point in time cuts are no go, Obama nailed he's colours to the mast and wants to grow the economy by investing into the economy with the idea that economic growth will bring in extra tax revenues thus he has to borrow less but from what I read today in the Financial Times the US economy has just hit a soft spot in its recovery.

[GrnEyedDvl]

What does the US government need a good credit rating for if it is legally prevented from borrowing?

We are not prevented from borrowing, and as a result we have a $14 trillion debt.

I think you will find the US governments spending is heavily supported by borrowed debt the majority of which is either bonds or foreign debt. The problem for Obama is if the credit ratting is cut then borrowing money suddenly becomes more expensive which means more income goes on paying debt interest which means he has to borrow more to keep up spending or he starts cutting. At this point in time cuts are no go, Obama nailed he's colours to the mast and wants to grow the economy by investing into the economy with the idea that economic growth will bring in extra tax revenues thus he has to borrow less but from what I read today in the Financial Times the US economy has just hit a soft spot in its recovery.

Thats a good assessment of it, nailed his colors to the mast. Of a sinking ship.

[justicar5]

What does the US government need a good credit rating for if it is legally prevented from borrowing?

unless you are removing the overdraft function as well as the loan fnction it still needs to borrow (just on a much shorter term) bills being paid before tax revunue comes in need a buffer.

[Sphere]

Lets be clear though, stimulus spending is largely over and the level of Federal spending has returned to what has been more or less the norm for the past 30 years (though still on the high end) ...

Spoiler Alert, click show to read: 

However, the level of Federal revenue is at a level not seen since the 1940's

Spoiler Alert, click show to read: 

So the current "investment" strategy has been to not take as much out of the economy in the form of Federal revenue, which is largely a conservative notion.

[GrnEyedDvl]

So the current "investment" strategy has been to not take as much out of the economy in the form of Federal revenue, which is largely a conservative notion.

You have that a bit backwards. They are not talking less out of the economy by choice, but rather because revenues are down because of bad economic policy.

[Sphere]

You have that a bit backwards. They are not talking less out of the economy by choice, but rather because revenues are down because of bad economic policy.

Revenue/spending are both shown normalized to be a percent of GDP, not absolute values.

Revenue as a percent of GDP is not terribly swayed by economic swings because much of Federal revenue comes from income taxes, and rises/falls in incomes are closely linked to the economy. (There is some effect from corporate and capital gains taxes as taxable profits often disappear completely in down turns, not just diminish in line with the economy like overall income)

And perhaps you missed the stimulus tax cuts, across the board extension of the Bush tax cuts, and the recent reduction in payroll taxes, as well as a several new tax expenditures. Those were all very much deliberate choices to reduce the percent of the economy going to federal revenues.

[GrnEyedDvl]

And perhaps you missed the stimulus tax cuts,

You mean the ones for people that werent paying taxes in the first place? Or do you mean the measely $100 per couple reduction? Theres a nice little graphic there that shows the difference between 2010 and 2011. It ends up to be about $200-250 per family where Bush's similar plan was only $300. Small potatoes on both plans, shame on them both.

across the board extension of the Bush tax cuts,

Extending something that is already in place does not change the mix.

and the recent reduction in payroll taxes,

You mean the FICA payroll tax increase?? I pay a boatload in that, one of the reasons I sold off some business assets. That and the 3.9% payroll tax on health insurance plans that went into effect in June of last year.

The FICA tax rate, which is the combined social security tax rate of 4.2% and the Medicare tax rate of 1.45%, will change to 5.65% for 2011.

Perhaps you missed all the tax increases. Cigarette taxes, fuel taxes, tanning salon taxes, Medicare tax increases, the list goes on. So while you might save $250 on your federal tax return, you end up paying much more than that through other taxes that have been imposed.

[Sphere]

Actually I was talking about the largest 2 year tax cut in US history. Which was ontop of two tax rebates passed in the tail end of the Bush administration

FICA payroll tax increase: Says quite cleary FICA tax for SS is decreasing 2% for employee's in 2011 (6.2% down to 4.2%)
Medicare tax : Begins in 2013
fuel taxes: Proposed tax increase on jet fuel, never became law
tanning salon taxes: Worlds smallest violin
Cigarette taxes: Worlds smallest violin

Much more important, the estate tax was completely repealled for 2010 (off topic, but I wonder if the death rate of people with 3.5 million+ estates increased that year), and was revised almost into non-existence for 2011 (estates under 5 million excempt, top rate dropped to 35%)

[GrnEyedDvl]

Actually I was talking about the largest 2 year tax cut in US history. Which was ontop of two tax rebates passed in the tail end of the Bush administration

Cant find a better source than a blogger? Even though MSNBC is filled with people that love to slobber all over Obama, even they managed to do the math on this mostly right.

The $400 credit for individuals is to be doled out through the rest of the year. Couples are slated to get up to $800. Most workers are to see about a $13 per week increase in their take-home pay. In 2010, the credit would be about $7.70 a week, if it is spread over the entire year.








People who do not earn enough money to owe income taxes are eligible for the credit, an attempt to offset the payroll taxes they pay.

Also dont forget that because of how the Earned Income Tax credit works, that most people dont really receive this cut in the first place.

FICA payroll tax increase: Says quite cleary FICA tax for SS is decreasing 2% for employee's in 2011 (6.2% down to 4.2%)

The employees portion yes, read the employers portion.

Medicare tax : Begins in 2013

So? That tax cut you mentioned above is spread over multiple years as well.


[quote]fuel taxes: Proposed tax increase on jet fuel, never became law[quote]

tanning salon taxes: Worlds smallest violin

But I thought my taxes wouldnt go up one thin dime?

Cigarette taxes: Worlds smallest violin

Considering there are 30 billion packs sold annually, thats a big chunk of change. Also considering that a higher percentage of poor people smoke compared to the higher incomes its a direct slap in the face to them. So you give them back $8 a week, then take away another 10-12 if they smoke.

Much more important, the estate tax was completely repealled for 2010 (off topic, but I wonder if the death rate of people with 3.5 million+ estates increased that year), and was revised almost into non-existence for 2011 (estates under 5 million excempt, top rate dropped to 35%)

There shouldnt be an estate tax anyways. You work and pay taxes all your life, and manage to save some. You should give some of that to the government just because you happen to die?


But all this aside, this is about far more than tax policy, its a total economic policy. We simply cannot continue to spend more than we have the ability to collect in taxes. I posted the link in another thread that has a daily update from the treasury department and shows how much interest we pay on the debt every single day. You can get that in spreadsheet form here. $244 billion so far this year just in interest, and they now want to raise the debt ceiling and borrow more.