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Credit Agency Actions: Their Rationale and Remaining Choices

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Last week, Standard and Poor’s dropped the United States of America’s credit rating. S&P’s downgrade of the U.S. sovereign credit rating to AA+, although not totally unanticipated, adds uncertainty to the world markets. The implications include pushing up borrowing costs on everything from mortgages and corporate debt to government bonds everywhere. The world’s largest, greatest and safest economy is no longer the safest; at least for now. Standard and Poor’s had concerns about the recent difficulty Washington had in arriving at a debt package just a day before an all but certain default.

More particularly, the revisions show that the recent recession was deeper than previously thought, so the GDP this year is lower than previous projections in both nominal and real terms. As a result, the debt burden is slightly higher. Generally, debt burdens tend to be higher in recessions due to involuntary unemployment, lower tax receipts by governments, and the required safety net with which the government protects citizens from economic hardships. The Fed holds more than $1 trillion of U.S. treasuries. That’s over 70 percent of all outstanding debt, making it the largest U.S. lender on earth. In addition, the states have debt concerns quite apart from the federal government. The lowest per capita debt is in Tennessee ($674) while the highest per capita debt is in Massachusetts ($10,500). Individually, the states have been slashing budgets to lower their debt per capita.

Second, the revised data highlight the sluggishness of the current economic recovery when compared with rebounds following previous post-war recessions. S&P believes the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, the S&P downside case scenario assumes relatively modest real trend GDP growth of 2.5 percent and inflation of near 1.5 percent annually moving forward. Possible cures for a lag in demand include increasing exports of goods and services, as well as infrastructure projects which may be paid for by tolls in the future. The Obama administration has projected a considerable increase in exports by 2014.

The Moody’s Corporation held their U.S. credit assessment at a top rating for now. Despite avoiding a downgrade, that company provided a sobering assessment for investors worldwide. Moody’s said the United States and other major Western nations have moved “substantially” closer to losing their stellar ratings. The ratings are stable, but their distance to downgrade has in all cases diminished considerably, the credit ratings agency pointed out.

The United States Federal Deficit is projected to fall from $1.3 trillion to $800 billion by 2015. The U.S. real GDP may grow from $13 trillion to $16 trillion or more in the same year. Defense is held to a constant $900 billion in the same four-year period. If the line is held at $900 billion, the defense budget will decrease from the current 7 percent of GDP to 5.6 percent of GDP but not down to the 3.5 percent of GDP at the conclusion of President Clinton’s term. Essentially, the disengagement from the Iraq and Afghanistan wars make up the difference in DOD spending.

In 1941, the rich (the captains and managers of industry) paid 55 percent of all federal taxes and workers 45 percent. A top rate of 90 percent or higher taxed the incomes of the wealthiest citizens. President Franklin D. Roosevelt, elected with considerable labor support, said that no American should have an income of more than $25,000 after taxes; about $350,000 in today’s dollars. And so, the question involves who will pay the bill for the dual wars of the previous decade, as well as the winding down of those wars in Iraq and Afghanistan.

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About Dr Joseph S Maresca

I've taught approx. 34 sections of collegiate courses including computer applications, college algebra, collegiate statistics, law, accounting, finance and economics. The experience includes service as a Board Director on the CPA Journal and Editor of the CPA Candidates Inc. Newsletter. In college, I worked as a statistics lab assistant. Manhattan College awarded a BS in an allied area of operations research. The program included courses in calculus, ordinary differential equations, probability, statistical inference, linear algebra , the more advanced operations research, price analysis and econometrics. Membership in the Delta Mu Delta National Honor Society was granted together with the degree. My experience includes both private account and industry. In addition, I've worked extensively in the Examinations Division of the AICPA from time to time. Recently, I passed the Engineering in Training Exam which consisted of 9 hours of examination in chemistry, physics, calculus, differential equations, linear algebra, probability/ statistics, fluids, electronics, materials science/structure of matter, mechanics, statics, thermodynamics, computer science, dynamics and a host of minor subject areas like engineering economics. A very small percentage of engineers actually take and pass the EIT exam. The number has hovered at circa 5%. Several decades ago, I passed the CPA examination and obtained another license in Computer Information Systems Auditing. A CISA must have knowledge in the areas of data center review, systems applications, the operating system of the computer, disaster recovery, contingency planning, developmental systems, the standards which govern facility reviews and a host of other areas. An MBA in Accounting with an Advanced Professional Certificate in Computer Applications/ Information Systems , an Advanced Professional Certificate in Finance and an Advanced Professional Certificate in Organizational Design were earned at New York University-Graduate School of Business (Stern ). In December of 2005, an earned PhD in Accounting was granted by the Ross College. The program entrance requires a previous Masters Degree for admittance together with a host of other criteria. The REGISTRAR of Ross College contact is: Tel . US 202-318-4454 FAX [records for Dr. Joseph S. Maresca Box 646 Bronxville NY 10708-3602] The clinical experience included the teaching of approximately 34 sections of college accounting, economics, statistics, college algebra, law, thesis project coursework and the professional grading of approx. 50,000 CPA examination essays with the American Institute of Certified Public Accountants. Additionally, membership is held in the Sigma Beta Delta International Honor Society chartered in 1994. Significant writings include over 10 copyrights in the name of the author (Joseph S. Maresca) and a patent in the earthquake sciences.
  • John Lake

    FDR had some uncommon notions, apparently. His words provide precedent for an increase in taxation. I am concerned about the two trillion dollar mistake; our nation borrows from and lends to itself with impunity. I suspect some desire to prevent the full details coming to the attention of the media, and the public. I am concerned about Alan Greenspan’s casual suggestion of printing up some billions. Or trillions. Would we give that paper to China, or to Saudi Arabia? I believe both of those to whom we are indebted have declared they won’t take gold. If the new paper is based on the increased (500 fold) value of gold, they might reject it. But if they do take our warm paper, they can buy buildings, corporations, media outlets… what I anticipate is gloom and doom.
    Maybe the legislators are counting on another Alexander Bell, or Thomas Edison coming along. It one doesn’t we may be up the proverbial creek without the celebrated paddle.

  • Baronius

    Standard and Poor’s didn’t simply have a problem with the difficulty the government had in brokering a debt limit deal. They had a problem with the results.

    Secondly, $1T isn’t 70% of the total outstanding debt.

  • http://www.lunch.com/DrJosephSMaresca Dr Joseph S Maresca

    The article mentions that the credit agencies project a slower growth due to the unexpected depth of the recession. The $1T is the deficit which is projected to go down below $800 billion at some point. The overall credit picture of the United States is still better today than after World War 2 when the layered debt was even more severe. Ultimately, President Roosevelt argued to tax the wealthier Americans at a much higher rate in order to pay down the war debt.

    The Obama Administration has projected a significant increase in exports by 2014. This incremental trade could create far greater economic growth to erase the deficit as a proportion of the total economy. As unemployment lowers, more people will go back onto the tax rolls and government revenues will swell as they did in previous
    Administrations like Reagan and Clinton.

  • http://www.lunch.com/DrJosephSMaresca Dr Joseph S Maresca

    There is so much to respond to that I’ll handle some of the salient issues only:
    (1) We need dismantlement of nuclear weapons and not more sophisticated ones. There is great promise in the ITER fusion project and in experiments like JET which bring us closer to nuclear fusion on a large scale.

    (2) This century, we will begin dismantling nuclear fission plants in favor of fusion and other “eco-friendly” technologies.

    (3) India and its neighbors should not be pursuing a nuclear weapons strategy. Instead, the converse is needed because a nuclear war cannot be won without massive dislocations. Witness the chaos in Japan from just a single nuclear incident precipitated by an earthquake.

    (4) There is a multi-nation research project proceeding on the ITER with cooperation from the USA, China, India and others. The Livermore project is also proceeding quickly on the fusion power front.

    (5) Some of your political comments on the firangi et al. require a thorough investigative reporting by an independent media.

    (6) Take a look at “Food First” by Lappe’ to see a practical food development program which is really needed for India’s poor.

  • John Lake

    It’s surprising that President Roosevelt wasn’t more widely criticized for his statements; it is surprising the wealthy at that time didn’t put up more vocal objection. Our current debt is certainly a war debt. The war in Iraq was costly, unnecessary, and produced nothing of value. The people are still of an insurgent mind, and won’t accept democratization, Americanization, and won’t, as GWB seemed to think they would, suddenly abandon their religions, too embrace ours. As to oil and natural gas … as I said, the war produced nothing of value.
    There are questions about our ongoing war in Afghanistan, another expensive proposition. The Taliban Pashtun vies with the “legitimate government” to control profits from drug crops, and to some degree, mineral wealth. No sensible person would still say that either of the wars here mentioned were for the purpose of capturing one specific individual, or a handful of individuals. Those free from ‘special interests’ will readily agree that it was Bush that wasted the money. Bush too saw a surplus and bought votes. To their detriment the Democrats felt obliged to do the same, and lost that battle.
    We can’t consider dismantling any weapons’ systems. China is provoking and taunting, and forcing us to spend money; we can’t just now call their bluff. As they acquire more of America in return for debts owed, the point of any military confrontation will be lost. By the same token, Saudi Arabia is a rich nation, and while we are working hard to view the Islamic as warm and welcome, speakers from the Near East warn us many Muslims are more volatile than we think. If the Islamic leadership in Iran chooses to become more aggressive, we will need to be prepared.
    I disagree that there was chaos in Japan over the nuclear plants matter. The Japanese are accustomed to hardships, and take them in stride. I doubt we could handle adversity so calmly. Word can’t convey what the Japanese have suffered in these recent months. Nuclear energy producing facilities, as has been demonstrated by the tsunami and earthquake are not terribly vulnerable. We learn as time passes to contain the energy source, and not to fear it. We can no longer depend on fossil fuels, and solar or wind power may evoke some interest, but are not a substitute for nuclear and fossil sources.
    I concede, I’m not much up on fission vs. fusion, and am not awfully knowledgeable about India, beyond that it might need some protection from Pakistan if matters go in a bad direction.

  • Cannonshop

    #5 We’ve been 20 years from practical fusion for the last forty. I project we’ll be 20 years from practical fusion for the next forty years too…and maybe for the next forty after that. It’s like looking for perpetual motion, or energy that is produced at a greater rate than it is expended.

    The Japan experience is with a reactor that was built in the late 1960s to plans and specs developed in the 1940s and 1950’s, better fission reactors already exist, we just can’t build them in the United States, the Lawsuit culture and NukularPhobia are too pervasive to allow it.

    Likewise, we’ve had steady, reliable electric sourcing for over a century-it’s called Hydroelectric, and teh structures control flooding, and the Lawsuit culture and Greens want to tear the dams down, so there you go.

  • http://www.lunch.com/DrJosephSMaresca Dr Joseph S Maresca

    The Iraq engagement could have ended earlier if we addressed reconstruction as part of the exit strategy. Afghanistan is a different story. Ultimately, Alexander the Great did not prevail in the scheme of things. The Soviets withdrew from Afghanistan because the engagement was simply too costly militarily. At some point, the USA will do the same. The USA might leave a small military base with some commando forces and drones in place for a time. I don’t foresee
    a continuous expenditure of multi-billions of dollars.

    It makes more sense to cut a deal with the tribal leadership to find out what they need and how the USA could help build the municipal infrastructure of the region generally.

    The USA needs to explore the energy opportunities right here. i.e. oil and natural gas, wind, geothermal, coal gasification and many other options.

    Once $200 billion or so is removed from the military budget- our debt woes should subside substantially. That combined with robust economic growth at some point this decade should mean a return to normalcy.

    Having said all of the above, I have to state unequivocally- READ MY LIPS- NO NEW WARS !

  • Cannonshop

    #7 well, it’s too late, you’ve already gained two more, from the President that campaigned on ending the two from the LAST administration.

    I posit and hypothesize that the only reason we don’t have divisions moving to Libya right now, is that there aren’t enough available to escalate that thing…at the moment.

    at this point, we have four wars we don’t need, and really six if you count all the social ills our leaders have decreed a “war On”-the Drug War, for instance, or the War On Poverty.

    200 billion out of 13 trillion is a drop in the bucket, it won’t even shake up the progression of indebtedness, economic rot, and enervation of the economy.

    doesn’t mean it’s not a good start. A better start would be to cancel the wars, cancel the expansive and largely unnecessary PATRIOT ACT, Cancel the expansion of entitlements, cancel some entitlements, eliminate several non-constitutional entities such as Dept. of Education, Energy, HUD, and Labor, along with agencies like BATF (really, do we need Federal Agents selling Mexican Gangsters guns??seriously???) consolidate CIA, NSA, and DHS into a single, smaller agency and eliminate their domestic functions, maybe get rid of a few other agencies that are basically jobs programmes for the non-contributing, consolidate and simplify the tax-code to a system designed to generate REVENUE instead of a system designed to incentivize behaviour and enable Graft, stop bailing out wall streeters and their banker friends, stop bailing out car companies that can’t build a decent car, end Subsidies that have bankrupted Farmers and created the conditions for the Corporate Farm, stop tearing down infrastructure, and stop pretending that scientificism is the same as Science.

    Reset to base zero, then look at what we REALLY need, instead of just propping up programmes well beyond their useful life span.

  • http://www.lunch.com/DrJosephSMaresca Dr Joseph S Maresca

    Cannonshop:

    The Super Congressional Committee is supposed to be looking into all of the things mentioned in the above. If they do a thorough job, a series of meaningful consolidations will happen and confidence will be restored in the markets and in the rating agencies like the S & P and others.

    The Pentagon budget is in the vicinity of $900 billion dollars. Minus these wars, the budget would be much lower- perhaps $600 to $700 billion dollars or 4.6% of the equivalent GDP assuming a $13 trillion dollar economy and 3.75% of the equivalent GDP assuming a $16 trillion dollar economy coming up in 2014 or so. That level would restore the defense budget to the end of the Clinton Administration when the budget stood at about 3.5% of the equivalent GDP.

    One thing is in order. Read my lips. NO NEW WARS.

  • Cannonshop

    #9 the DoD needs to drop to 2.7 to 3% GDP for the proportion to be healthy. The thing with “Super Committees” is that they provide a committee membership for congressmen, but rarely generate meaningful results, when they generate results at all.

    The scope of investigation is just too big, and the opportunities for promotion of graft too deep, not to mention the investigations take too long, esp. with Congress, which already has a poor record of showing-up-for-work (as a body. Watch C-Span sometime, take note of the empty seats, esp. in the second year of the term…)

    On defense spending, some of the programmes that have been cancelled due to cost overruns had those cost overruns generated by Congressional Action-the unit-cost of the F-22 is a good example of this, export sales were cancelled, the unit cost went up dramatically, because there was no chance of taking advantage of either economies of scale, nor income from foreign sales that would lower the unit-cost for the USAF. The JSF situation is a prime example of letting DoD change its mind mid-trials, then shifting the mission of the system repeatedly during development until you have a prototype that doesn’t do the job, no production lines available, and your export customers are now turning to other suppliers.

    DoD is maintaining fleets of aging aircraft-the older the airframe, the more it costs to maintain in flyable (or deployable) condition. We’ve lost capabilities we used to have due to obselecence of equipment in the field-which also raises costs, and the obsession with the Middle East has degraded our ability to support long-time allies whom are under real, immediate and serious threat, such as South Korea, where we get a good percentage of the merchant fleet now that shibuilding is effectively dead in the United States aside from a handfull of Yards that are so DoD dependent that they might as well be Navy facilities save for the poor quality of their work-a poor quality largely due to being too long on uncle sam’s teat, where politics exceeds performance in the awarding of contracts.

    We used to make things in this country. At this point, the Aviation industry is one of the few where the U.S. is a net exporter, and Boeing is a big chunk of our export income…

    but for how long? The trend is NOT toward building things, and you can only reshuffle the same wealth so many times before it’s dried up.

  • John Lake

    “No New Wars” is a great rallying cry, but not a pragmatic concept in the real world. We are fortunate to have B. Obama and his administration working with Iran, and North Korea. As he listens to what they have to say (particularly in the case of N. Korea) the likelihood of an unexpected attack on us is significantly reduced.
    The government in Pakistan took American money and walked away. This doesn’t speak well of our skills at negotiation. Obama should learn to micro-manage, where micro-management is warranted. There is some possibility of Pakistan becoming a hostile agency in the future.
    So we need a ready military, and we need the weapons of war. we don’t need futuristic machinations, and we probably don’t need “star wars.”
    Obama has never saught after political victories. He seems to do the best for our nation without giving in to that demon. $100,000 for Somalia was his decision, and it might have been a weighty one.

  • http://www.lunch.com/DrJosephSMaresca Dr Joseph S Maresca

    The Super-committees realize that they must perform in order to satisfy investors.

    Quite a bit of investor money is on the line. So, the primary goal will be to craft a rational budgetary baseline with reasonable assumptions so that the market can digest this information and return to normal. The pressure of an oncoming election year is another strong motivating factor.

  • Cannonshop

    #12 Actually, they realize what they knew in the campaigns they ran to get elected-they have to LOOK GOOD, which may mollify Investors for a short time-long enough, to, say, win an election.

    They don’t have to turn out serious results, esp. if serious results will cause powerful contributors to close their pocketbooks for the next campaign.

  • http://www.lunch.com/DrJosephSMaresca Dr Joseph S Maresca

    There are a lot of places to save money. i.e.
    (1) $200 billion on the Afghan/Iraq wars

    (2) $200- $300 billion on federal Medicaid and related programs by implementing a wellness care program and excess consumption taxes on junk food

    (3) Monies generally by implementing up – to date technology throughout the government

    (4) Implementing solar energy on as many federal buildings as possible

    (5) Expiring pharmaceutical patents allow for cheaper generic drugs

    (6) Upgrading motor vehicle fleets to natural gas or electric cars

    These are just a few of the things that can be done. I’m sure that experts in government can think of many more.