America, Peter wants his money back

By Michael Vass | July 26, 2011

If you are unfamiliar with the famous reference suggested in the title, it goes:

Stealing from Peter to pay Paul.

It’s the way that many people, and the US Government, pay their bills. Taking money from one bill and using it for another. On a personal level that means maxing credit cards to pay another card, or paying less on one bill to just cover another. In terms of the Government it means buying our own Treasury Bills or lending money to say Fannie Mae so they can pay back the money with interest – via continuous federal funding coming from the Government in the first place.

No matter how you want to do the math, even if it is Government math, the result is the same. Debt increases, the ability to pay off that debt decreases. Eventually creditors stop offering the money to shuffle from one hand to another, and the whole thing implodes. As an individual that means bankruptcy, maybe losing a house, repossesion of a car or furniture, a loss of assets. As a Government, well that is another situation entirely.

The closest guess anyone has for a complete failure of the Government on a monetary level currently is Greece. Riots, bailouts from other countries, a credit rating so low that it does matter what the actual rating is, and external governments imposing restrictions and requirements on how the people will get paid and live. Except, since America is massively larger (both in GDP and debt) the problems are exponential.

The answer currently being proposed is hardly inspiring. Republicans are gearing up to let the debt ceiling go unraised – which will lead to an increase in interest rates. That means debt will accumulate faster for individuals and the Government. It also means that various parts of the Government will cease to function, or at least function as inefficiently as they currently do. It means that the way of life for all of America will forever change.

That also results in a downgrade of the currency, dethroning America as the critical choice of investment around the world. The ramifications of that are long-lasting and widespread. Inevitiably, someone will rise to the top of the hill, but the odds are it won’t be America any more.

On the other hand there is the plan by Democrats. It can be summed up as, spend the money and tax anyone who still has money. The Reid Plan, as we earlier pointed out, uses smoke and mirrors and Government math to create savings that don’t exist. Which is fine if all you need to do is argue with a political opponent and confuse constituents. But international economists and business leaders actually do the math. Real math. Which means they will NOT be distracted or confident.

That leads to an increase in the interest rates, a downgrade of the credit rating for America, and almost all of the above. Just a bit slower in getting to the cliff, and a lot faster after falling off of it.

How bad is it?

According to the latest Reuters poll of 53 economists, a majority (30) expectthe US to have its credit rating downgraded. Shocking news? Not really.

The Obama Stimulus has cost $821 Billion and continuing to rise. That’s more than the todate cost of the Iraq War, in less than half the time. At this moment every major objective of the Stimulus has failed to be achieved. In fact, it has cost roughly $185,000 – $278,000 per job that was created (not factoring in infrastructure improvements, which are highly debatable as to a return on investment basis). The Stimulus created some jobs, but improving the economy never happened.

Looking at Health Care Reform, there still is no consensus on the actual cost to the average American. Healthcare costs have increased, at times and for certain institutions and individuals by as much as 20%, and still increasing. Recent reports indicate that more than half of employers are preparing to drop health care coverage rather than be involved with the cost. The CBO has proven that the actual cost is NOT deficit nuetral and will increase the debt. Which says nothing at the effect on the overburden of doctors, and the disincentive for new doctors, will have on the economy.

The cost of Libya has already exceeded $600 million dollars (on April 11, 2011) with estimates of on-going costs being $40 million a day – with NATO leading the operation. There is no exit strategy, as well as plan, for the war in Libya. It could take months, years, even decades. There is no way to know, nor any indication of a timeframe. Even if the Libyan war ended tomorrow, there is no tangible benefit to America for the expense and effort made. Nor is there any foreseeable tangible benefit.

Federal workers are another consideration.

“The job security rate for all federal workers was 99.43% last year [2010] and nearly 100% for those on the job more than a few years.”

That means that however poorly you perform your job, however inefficient and wasteful the Department or Agency, you are more likely to die than be fired. That’s almost the definition of waste; employing people that have 0 motivation to do a good job or create a benefit from their work. It implies a lack of leadership, an inability to delegate or manage, and a disregard for the bottom line.

Any 1 of the above examples is bad, but not enough to downgrade America. But add them together, then throw in the fact we spend far more on SS than we earn. Add in the costs of union pensions that exceed contributions by multiples. Add in the trend of spending more money than the year prior, that does not exist. Add in the interest rate at anything but the basement level it currently holds – and how that effects the debt level. Start doing the math on just that and compare it to the definition of AAA rating.

AAA credit rating (as defined by all rating agencies) – An obligor has EXTREMELY STRONG capacity to meet its financial commitments.

Considering the examples (and there are many more), does that definition fit America? Does it fit based on the proposals of the Obama Administration? Or even the proposals of Republicans?

How about this defintion:

An obligor is LESS VULNERABLE in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitments.

That sounds far more accurate yes? That is, at best, a BB+ (or Ba1) credit rating. It is below investment grade, considered specualtive at best, and implies (for corporations) a default risk of 29.93% (according to S&P). That would put us in the same category as Azerbaijan, Egypt, Indonesia, Latvia, and Philippines. None are known for their great quality of life.

In summation it all leads us back to the title and the quote we were referring to. No matter if the debt ceiling is raised or not, Peter is asking to get paid. We have debts that must be cleared. Avoiding to do so may be politically expedient, and could win elections, but it will not fix anything. Pretending to fix the problem just means someone else will have to pay in full, whether they can or not. Emphasis on not.

Put it another way, there is a logic that states you should warn a child not to touch something hot, then stand and watch them as they touch it anyway. If the child gets singed, they will heed the warning the next time they are told something is hot. IF you don’t do this, then the child will never know and may severely hurt themselves at a later date.

If America is singed by a downgrade, and a reduction of spending with definitive plans to pay down the debt, then it may well be worth it. because the alternative is being burned by the debt we fail to control.


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