Who has the power to reduce the US to a pile of rubble, crash international markets with a word, and chastise the world’s oldest republic without fear of retribution? S&P’s David Beers, is the world’s puppet master, of course. To listen to the Obama administration, the entire point of Pres. Obama’s insistence on tax increases was to avoid the wrath of Mr. Beers. S&P’s Sodom like rain of fire on the once secure US is just punishment for a failure to compromise (i.e. raise taxes), or so says Obama. Beers is, of course, not a world leader, not an elected official, and not a nation crushing billionaire hedge fund operator. In fact, S&P’s opinion of US sovereign debt is lost in a sea of market opinion.
Apart from cash of all denominations, US Treasuries form the largest, most liquid, and most closely followed market. Thousands of people, each armed with S&P’s knowledge and skill, evaluate US Treasuries each day. S&P’s downgrade was not news; it was just the addition of another opinion to the mix. In March, PIMCO removed US Treasuries from its largest bond fund – a more significant pronouncement on the US’s credit worthiness.
Shamefully, the Obama Administration blamed the messenger, claiming that S&P’s methodology was flawed, but understanding the US Government’s mess does not require an MBA, or even the back of a cocktail napkin. Government revenues are tied to anemic GDP growth, but Government expenditures are tied to an aging population and exploding health care costs. The Government cannot possibly afford to fulfill its obligations of debt service and entitlements given that grim reality. Even if S&P was off by $2 trillion in its calculations, the error is a drop in an ocean of debt.
Either the US will fulfill its obligations or it will disintegrate as a nation, which illustrates the futility of S&P’s analysis. If the US does not reform its insolvent entitlement programs, other spending cuts will only delay a collapse. If the US does restructure its entitlement programs, a AAA credit rating is well deserved. S&P suggests a middle ground, which is the one unlikely outcome. As such, absent meaningful reform, look for more credit downgrades.
S&P’s downgrade offers no new insight into the US’s deep troubles, but because of its iconic quality, the lay-public may have received a wake-up call. Naturally, the far left is livid, and it blames the Tea Party. The Left knows that its mission of establishing a socialist-light regime depends on continued deficit spending, and the S&P decision naturally tends to support the Tea Party’s call for spending restraint.
Dems’ vitriol against the Tea Party (“Terrorists”) and S&P (“Stunning lack of knowledge”) exposes their true motives. No rational observer can now claim that the US is not in deep trouble. No rational observer can now claim that Social Security and Medicare can continue without significant reforms. If the Dems truly wanted to save its welfare-state crown jewels, they would be seriously negotiating how to restructure entitlements so that they do not collapse and take the US with them. Instead, the Dems launched a myopic and desperate power play to counter S&P’s plain truth.
Dems, especially their far left fringe lead by Obama are trying to turn the S&P downgrade into class warfare – firing up their base for the 2012 election. This is sad, because Obama used the rhetoric of unity (as hollow as it was) to win in 2008. Also, this is pathetic, because independent voters are unlikely to buy Obama’s new angry pitch, and indeed his ratings among independents continue to fall. Mr. Beers and S&P are hardly power brokers, but they have just become pawns in an ugly game of electoral chess.