And The Walls Came Tumbling Down

by Hunch on August 6, 2011 · 2 comments

in Politics/Policy

By now even those of us living under rocks must know that S&P have taken the bold and idiotic action of downgrading the U.S. debt rating.  Like most economists I have an on-the-one-hand but on-the-other-hand argument with this particular decision. 


On-the-one-hand this should clearly present to the President, Congress, U.S. citizens, and the world that the U.S. government is over levered and budgets unsustainably and without consideration.   This is a defining moment in U.S. history on par with the First Continental Congress; going forward spending and revenues can either be set with a strong fiscal discipline guaranteeing our status as a superpower or continue the current trajectory that will lead to a balance sheet and government financing issues similar to the current Greek situation.  Hopefully the S&P downgrade will serve as motivation to make the drastic changes necessary to ensure a prosperous future.  For further analysis see Making Cents Of The U.S. Debt Crisis .


 On-the-other-hand, as we all know from the recent debt ceiling negotiations, the Fourteenth Amendment provides that government debt is absolutely guaranteed.  U.S. government revenues are derived from taxation of the U.S. economy which, at the current debt level GDP, should be able to service the current debt load.  Moreover, let’s not forget that the U.S. government can always print more money.  While paying off debt by printing money would be devastating to everyone who holds dollars, unless the debt is tied to inflation, printing money is a theoretical though terrible solution; the debt says how much has to be repaid not the value of the remittance.  Since the government has to do anything to service its debt and currently has the means to do so, it is specious to say that the U.S. government has any risk of default.  By law and currency control, it is impossible for the government to default which makes S&P’s downgrade a manipulation of the debt market.  It is probable that the S&P downgrade is a public service and that the debt market manipulation won’t be investigated since the U.S. government is in no position to take on this particular case.


I wouldn’t want to be seeking a loan right now and burying gold in the backyard rather than investing in securities sounds pretty good; I expect that in short order the U.S. government rating will be restored, the markets will begin to crawl back and hopefully the U.S. electorate will send a clear message to their representatives about blending business acumen with political ideology during budget negotiations. Worrying is useless; if you can affect the outcome stop worrying and act and if you can’t, lay back and go with the flow.  So please, let’s all return our attention to Shark Week.

{ 2 comments… read them below or add one }

puddles123 puddles123 08.09.11 at 09:25

Dear Hunchy,

I am your number one fan! How did you ever get so smart?? I bet all of your colleagues are jealous of how knowledgable you are!

-Number 1 fan.

ONeill 08.12.11 at 18:55

We will always be triple A because Obama said so, S&P decision meant nothing. This was a manipulate downdraft.

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