As expected, the markets plunged this morning, in the first day of trading since Barack Obama’s historic achievement in downgrading the AAA credit rating of the United States. As of this writing, the Dow Jones has dropped 300 points.
This is all going to get worse before it gets better. A crisis of confidence is rippling outward from the downgrade of a massive government that has asserted the right to micro-manage every aspect of the economy. S&P downgraded Fannie Mae and Freddie Mac, too. This is the kind of no-confidence cascade that builds into a market panic.
The President himself vanished over the weekend. His first statement since the downgrade will come three days after it happened, at 1:00 PM this afternoon. It was probably a smart political move to keep him off television, but this kind of appalling milk-carton absence of leadership is one of the reasons we’re in hot water with the credit agencies. Obama’s dexterity at avoiding responsibility is not reassuring to investors looking for signs of real change in a dying system.
It’s important to note that Standard & Poor’s didn’t just declare America’s debt level to be too high. They took action because they believed it would continue to get higher, and they don’t believe the American government can do what is necessary to stop the fiscal bleeding.
S&P didn’t phrase this as a partisan critique of either party. There’s plenty of blame for decades of irresponsible spending to go around, but pretending Obama and the Democrats weren’t in total control of Washington during the years when it blasted into orbit is just plain delusional. The markets are in turmoil because crazy people are running Washington, and they’ve got plenty of support from a dedicated media, plus a solid base of voters willing to buy their swill until the streets are filled with burning cars.
Opposing Barack the Mad and his court is a weak Republican Party that generally lacks the courage of its convictions, and has demonstrated a depressing willingness to compromise with ruin. Establishment Republicans were just as quick as fiscal kamikaze Democrats to insult those who are serious about the government’s spending problem. The insults were milder – “hobbits” instead of “terrorists” – but the implication that fiscally responsible people had no place in Washington was equally clear.
Were Republican defenders of the debt ceiling compromise, which so quickly and spectacularly failed to protect America’s credit rating, correct when they called it “the best deal they could get?” If so, they merely vindicated Standard & Poor’s judgment. The “best deal” wasn’t nearly good enough. Its effect on the deficit, even granting all of its promises and assumptions, was minimal. S&P acted against the $20 trillion debt of 2020, as much as the $15 trillion debt of today.
The attempt to twist this development into another angry demand for tax increases also validates S&P’s decision. Tax increases don’t always produce more revenue, and they never produce as much revenue as their advocates predict. The tax increases Democrats have been howling for, ending the hated “Bush tax cut for the rich,” would produce $700 billion over the next decade at best – and that’s granting the ridiculous premises of static analysis. This best-case number works out to five or six percent of the projected ten-year deficit. The new Democrat Party line blames our credit downgrade on Tea Party refusal to go along with a measure that would have “fixed” 5% of the problem.
Of course, it’s possible Democrats have been lying to their gullible supporters about how much they really want to raise taxes. Massive, broad-based tax increases would crush the economy Obama has already left in tatters. That’s suicide, not a solution.
Blaming Republican “intransigence” for delaying a debt ceiling increase too long also contributes proof to the S&P analysis. They’re concerned about rising debt… and Democrats are trying to claim that the refusal to let them rack up debt faster, with fewer conditions or promises of restraint, caused the downgrade?
Top-level market analysts don’t get their news from watching CNN in airport lounges. They know Obama offered exactly one specific proposal during the past year: a disastrous fantasy of a budget that got laughed out of Congress. They know Democrats were content to let the government run out of control, without a budget, for over two years. They know Obama walked away from a deal with House Speaker John Boehner that would have included hundreds of billions in revenue increases. They know Democrats sat on their hands, loudly stating that offering specific proposals would damage them politically, while the Republican House passed everything from Paul Ryan’s plan to the Cut, Cap, and Balance Act.
The idea that Democrat irresponsibility might be rewarded politically – that the “Tea Party Downgrade” nonsense might actually work – is part of what has Standard & Poor’s spooked.
Moody’s is preparing to follow suit. According to Reuters, “In his first comments after the move by rival rating agency S&P, Moody’s analyst Steven Hess sounded a note of caution about Moody’s rating of the U.S., repeating that the August 2 plan to cut deficits by $2.1 trillion was positive for the U.S. credit standing, but not enough to keep its rating on a stable outlook.” In other words, they’re waiting to see what the Super Commission comes up with. Does anyone really think the Democrat delegates will cooperate in crafting a stellar package of serious spending cuts… or does it seem more likely they’ll dig in their heels and try to bludgeon Republicans into going along with meaningless, economically destructive tax increases?
I defy anyone to read Standard & Poor’s statements and conclude they would have been happier if the November 2010 elections had not been so strongly influenced by the Tea Party, and the latest debt ceiling increase had sailed through Congress without substantial debate.
S&P executive David Beers said on Fox News Sunday that “entitlement reform is important because entitlements are the biggest component of spending, and the part of spending where the cost pressures are greatest.” Entitlement reform? Isn’t that what prompted the entire Democrat Party to accuse Rep. Paul Ryan of wanting to murder old people? Didn’t they win a special election in New York by running ads that showed Ryan literally throwing seniors off a cliff?
How can any agency tell its clients, in good conscience, that a country in which those tactics work is a sound investment?