August 5, 2011

US Debt Crisis: Credit Default Problem 2011

U.S. Debt Crisis has been a big story lately becuse of the maginitude of impact globally:

US Debt Crisis Credit Crunch 2011

  • The U.S. government is paying net interest of just 1.4 percent of GDP on its public debt which is not much by any historical or international comparison. 
  • The relatively large annual deficit at present (9.3 percent of GDP) is overwhelmingly the result of the recession and weak recovery.  
  • The long-term deficit projections are driven by health care costs in the private sector.  These spill over into public spending because the U.S. government pays for almost half of health care spending, at a rate that is twice as high as other developed countries and rising fast.
  • There was never any chance that the U.S. would actually default on its debt. The whole "crisis" was manufactured from the beginning, with Republicans in the House of Representatives using a technicality to win unpopular spending cuts that they could not win at the ballot box.  
  • It worked: they got an agreement that promises large spending cuts without any tax increases on America's rich or super-rich, who have vastly increased their share of the national income over the past three decades.
  • The right won because President Obama chose to collaborate with them, also seeking to take advantage of the manufactured "crisis" to implement cuts that offended and hurt the people who voted for him.  Of course he also wanted to increase taxes on the rich, but because he had accepted the legitimacy of the Republicans' extortion, he lost that too.
  • The worst damage from this "weapon of mass distraction" and President Obama's capitulation to it is that the policy debate in the United States has been sharply altered.  
  • The phony "debt crisis" is seen as the main problem; and even more absurdly, a cause of the economy's weakness.  
  • The U.S. economy barely grew in the first half of this year, and we have 25 million people unemployed, involuntarily working part time, or having dropped out of the labor force.  
  • We are more than one-third of the way into a "lost decade," and the shift of the policy debate toward deficit reduction will increase the probability that we will experience the whole thing.
  • If President Obama loses both houses of Congress and/or the presidency in the next election, it will be the result of a weak economy and high unemployment, and because he let his opponents not only sabotage the economy which they are all too happy to do but also to redefine the economic debate so that the president and his party will get blamed for the mess.
  • Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings for the U.S. while warning that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.
  • The outlook for the U.S. grade is now negative, Moody’s said in a statement yesterday after President Barack Obama signed into law a plan to lift the nation’s borrowing limit and cut spending following months of wrangling between Democratic leaders and Republican lawmakers.
  • The compromise is a positive step toward reducing the future path of the deficit and the debt levels
  • JPMorgan Chase & Co. estimated that a downgrade would raise U.S. borrowing costs by $100 billion a year, while Obama said it could hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates. 
  • The ratio of general government debt, including state and local governments, to gross domestic product is projected to climb to 100 percent in 2012, the most of any AAA-ranked country
  • A downgrade is a sign that Congress is failing to address a real fiscal issue
  • A decision on the rating may be made within two years, or considerably sooner 
  • While the rating may be cut in the medium term, its risks in the near-term “are not high.” 
  • Although the agreement is a good first step in adjusting the fiscal challenges that the U.S. faces, it is just a first step
  • Standard & Poor’s put the U.S. government on notice on April 18 that it risks losing its AAA rating unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt. 
  • S&P indicated last week that anything less than $4 trillion in cuts would jeopardize the grade.
  • So far the threat of losing a AAA rating has been overwhelmed by concerns about a continued slowdown in the U.S. economy, supporting demand for Treasuries. 
  • Obama signed the debt-limit compromise on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.
  • The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. 
  • Recent downward revisions of growth rates and the very slow expansion recorded in the first half of 2011 call into question the strength of potential growth in the next year or two. 
  • Moody’s, which has rated the U.S. Aaa since 1917, put the U.S. under review for a downgrade on July 13 for the first time since 1996.
  • U.S. bonds and the dollar’s strength have signaled increased demand for the assets of the world’s largest economy even as prospects of a downgrade rose. 
  • Treasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January.
  • Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.
  • The dollar represents 60.7 percent of the world’s currency reserves, compared with the 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington.
  • China’s Dagong Global Credit Rating Co. cut its credit rating for the U.S. to A from A+ with a negative outlook

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