Downgrade Nation: Seeing Through The Charade Of Presidential Politics

by Austin Hill
The U.S. Federal Reserve initiated more economic stimulus. And the very next day the U.S. Government received another debt downgrade.

Did one lead to the other- or is there more to the story?

Amid last week’s headlines of Islamic terrorist attacks and domestic bomb threats, the news about another U.S. debt downgrade may have seemed anticlimactic. Yet this additional downgrade for the U.S. has been a long time in the making, has long-term ramifications, and was not triggered by the Federal Reserve alone.

After months of speculation, pressure, and mostly bad economic data, Federal Reserve Chairman Ben Bernanke announced last Thursday that he would launch a third round of economic stimulus code-named “QE3” (several media outlets, including CNBC and Yahoo! Finance, quickly nicknamed it “QE infinity” owing to its open-ended, no-end-in-sight nature). The plan, as Mr. Bernanke explained, is for the Federal Reserve to purchase $40 billion worth of mortgage-backed securities every month, and to do so for as long as he thinks it is necessary.

Of course, it was only five months ago that the Egan-Jones Ratings company downgraded the U.S. Government because of its profligate spending and total lack of interest in reducing its deficits, lowering it from a ”AA+” to a “AA” rating. After last week’s announcement about even more deficit spending by the Federal Reserve, our government continued its downward spiral on credit-worthiness by achieving Egan-Jones ‘ latest evaluation: a rating of “AA-.” Each of the other major credit ratings companies (Moody’s, Fitch, and Standard & Poor) gives the U.S. a slightly better rating, yet all of them forecast negative outlook” for our government’s credit worthiness.

In making its downgrade announcement, Egan-Jones stated that our government’s decision to issue more currency and to artificially depress interest rates by purchasing mortgage-backed securities will likely do very little to expand America’s actual gross domestic product, yet at the same time it will likely reduce the value of the dollar. The agency further noted that this decision will increase the cost of commodities, which in turn will hurt the profitability of businesses, and will increase the prices of consumer products thereby reducing consumer purchasing power.

The team at Egan Jones seems to be seeing things clearly, and, if nothing else, is displaying a sound grasp of some very basic economic ideas. Just as a drunken person cannot drink their way back to sobriety, no entity of any sort – no individual, no household, no organization nor any government – can borrow and spend its way out of debt. And the more indebted one becomes, the less trust-worthy one becomes with creditors – which ultimately leads to less prosperity.

What is perhaps most striking about Egan Jones’ response to the Fed is that it was the complete antithesis of the collective response from the stock market. Investors, traders and brokers were so exuberant over Chairman Bernanke’s choice to spend more of our non-existent tax dollars that the Dow was driven to a 5-year high on Thursday. Those who are entrusted to offer honest assessments of our government’s credit worthiness see the U.S. as inviting more trouble upon itself. Those, on the other hand, who are not so concerned with honest assessments, are apparently quite happy to trust in the gamesmanship and hocus-pocus of politicians and government bureaucrats- despite the preponderance of evidence that such government manipulation of the marketplace produces only short-term pleasure and a lot of long term pain.

And herein resides the greater problem for the United States and its debt: credit ratings agencies, foreign governments, and private individuals around the world are watching our country and observing our near-total lack of “political will” to get our fiscal house in order. Granted the Chairmanship of the Federal Reserve is, at least in theory, a non-political position in our government, and its occupant is not beholden to electoral politics. Presumably Chairman Bernanke has chosen to act in this way because he believes it is the right thing for him to do (although his choice to implement such a short-sided policy within two months of a presidential election has nonetheless raised doubts about his independence of the President).

But the fiscal recklessness of our government does not begin and end with Bernanke. It rests with the President and the Congress primarily – and especially with President Obama, given that he and his party controlled both the Executive and Legislative branches of our government for two years, yet he chose to harness that power for to create more government spending and debt and not less.

Our current presidential campaigns also give the impression abroad of an “out of touch America.” Vice presidential nominee Paul Ryan dares to address our dangerous condition, but only in the most minimal of terms – and for this he has been labeled “the Flim Flam Man” by the New York Times’ Paul Krugman, and is accused of allegedly hurting children, the elderly, and ethnic minorities with his proposed reductions in entitlements.

Add to this the reality that our President’s foreign policy is going up in flames before a global stage – yet he remains politically viable and popular – and it’s not difficult to understand why other countries are getting nervous. The real question in this, however, is when will Americans get nervous – nervous enough – that they demand fiscal sanity from their elected leaders?

It won’t happen between now and the next election day. But will it happen soon enough-before the politicians have done irreparable damage?


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