Wednesday, August 10, 2011

Understanding the US Credit Downgrade

Standard and Poors has downgraded the US Government's credit rating from Triple A to Double A plus. This is supposed to reflect a decline in the ability of the U.S. Government to repay debt.

On the face of it, this is a piece of total nonsense from a totally discredited source.

It is nonsense because the US Government prints its own money, so both interest payment and debt repayment can always be made.

The source is discredited by the fact that, with the other US ratings agencies, Standard and Poors rated toxic mortgage bonds Triple A, when they should have been rated Triple F crap. That they were not rated Triple F crap is the reason that the US and many other countries are now loaded with debt, both public and private.

That the more astute Wall Street operatives knew the mortgage bonds were crap at the time they were rated is evident from the fact that Goldman Sachs profited mightily by shorting the Triple A-rated crap, they'd only just created.

But even though S and P's downgrade of the US credit rating is bollocks from a totally worthless source -- sustained in business only by a stupid government regulation that requires an outside agency to rate all newly created bonds -- it is not insignificant.

Markets reacted sharply to the downgrade, but not as you'd expect if the downgrade had anything to do with the ability of the US Government to pay its debts or to maintain the purchasing power of the dollar.

On the contrary, US Government bonds rallied, and stocks sold off, because people evidently preferred to own dollars than real assets.

This response is consistent with the expectation that there will be further cuts to government spending, which will cause further economic contraction, which will drive down both incomes and business profits, which will mean a further decline in asset prices.

So what was it all about?

Paul Craig Roberts explains the downgrade as a blow by Wall Street in an ongoing struggle for dominance between Wall Street on the one hand and the military/security complex on the other hand.

Wall St. knows it has to down-size and it wants to ensure that the military/security complex,  its rival for power and influence over government, is downsized also. 

 The downgrade is damaging to the credibility of the Obama administration and thus intensifies pressure for spending cuts. The response of the military/security complex, suggests Roberts, is to demand cuts to social programs, not to the wars of imperial conquest or to the subjugation of the American people to TSA groping and the Homeland Security apparatus of civilian oppression justified by bogus terror scares featuring incompetent morons attempting to set light to their underwear or blow airliners out of the sky with build-it-on-board liquid bombs.

So far as it goes, the explanation is plausible. But there is another contender for resources and influence that Roberts does not mention: namely, the corporate sector, including both the military/security sector and the rest.

Nothing has done more damage to America's financial and material well being than the corporate sector's pursuit of wage-cost savings through off-shoring of production and services, out-sourcing of supply to low-wage economies, and the Federal-Government-sanctioned open door to illegal immigrants prepared to work for minimum wages, or for less than minimum wages in the roaring underground economy.

Thus, the corporate sector, which is the chief cause of collapsing demand, falling real wages and rising unemployment, needs government stimulus to raises demand and maintain profits .

In any case, the debt downgrade needs to be seen in the context of a struggle over the distribution of wealth among four sectors: finance, the military/security complex, the rest of the corporate sector and ordinary folks needing jobs and expecting to receive the pensions and other social services they've paid for through their taxes.

Almost certainly, the struggle will be resolved at the expense of the people, although as riots rage across England, the thought of revolution must be stirring in the minds not only of the people, but the ruling elite.

In summary, Wall Street pressure for further cuts to government spending is consistent with our view that the economy is being managed with the aim of driving wages in America toward parity with wages in Asia: this to be achieved by the maintenance of depression conditions that prevent nominal wages from rising, combined with continual currency devaluation that inflates away much of the real value of both wages and debts.

See also:
Mish's Three Cardinal Rules of Stimulus: All Wrong
Why economics is bunk and what that means for the economy
America's inflationary depression
USA versus China: Wage Convergence, Wealth Divergence and Global Hegemony
US Economy: Expecting the Unexpected
USA Boom or Bust: The Next Decade
Why China Booms While America Slumps
China's Economy Already Larger Than America's

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