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Standard and Poor’s, My Thoughts

  • Posted on August 10, 2011 at 4:27 pm

Just like every other American I have been wondering about the Standard & Poor’s decision to down grade the United States long term rating.  I have been thinking what affect it might have on the country and even my own personal situation.  The personal situation comes up because the stock market is so volatile.  Now I don’t have a lot of money, but I do have some investments and it seems to me that they had just bounced back from the beating they took in 2008.  I decided I would do my own investigation into this rating decision.  Instead of reading the newspapers, I personally think it’s best to go the source.

The reason seems to be tied more to politics than anything else.  We all know that the country seems to be on a confused path.  Most Americans know that the Bush tax cuts, especially for the wealthy, should not have been renewed.  We are at a point in this country where the politics from the Republicans and the Democrats seem to be weighing heavily on our country by the very ineptness showcased by both parties. We are left in our small towns and big cities wondering if there is anyone in this government that knows what the hell their doing.

I really believe that the Tea Party rhetoric totally exacerbated this situation.  Michelle Bachmann even continues to use this in her speeches as if she somehow has the correct solution to the problem.  The problem with her stance is that she still clings to the idea that voting no was a good solution because after all raising taxes should never happen.  President Obama, for his part, has been weak and ineffectual.  While he seems to be embracing those very items that the Republicans want like changes to Medicare and Social Security, he refuses to really push two things that could be game changers, raising taxes on the higher incomes and retracting from these endless wars.  President Obama has embraced just about every program President Bush began.  The Republicans actually should love President Obama as he gives into them at every turn.  The change in governing from the Bush times to the Obama times is really flawless.  There really isn’t any real change.  I know President Obama ran on the words, hope and change, but actions speak much louder than words.  From my perspective, President Obama is much closer to Republican thought process and governing philosophy than he is to Democratic principles.  So, you might be wondering why I see this as basically a political problem even though in my mind the two factions are actually close in their basic philosophies.  I see them as playing “good cop, bad cop” roles.  They show us how divided they are but secretly they are still going to parties together, golfing, and having friendships with each other.  How else could such seemingly diverse people like James Carville and Mary Matlin stand each other enough to be married to each other?  Now, you can say politics makes strange bedfellows, but I believe this is just another hoax on the American people.  The people in the two parties seem more interested in their own personal situations than they do the best interest of the country.  The politics have gotten in the way of governing.  Each decision seems to be a calculation about who is going to gain or lose from the decision.

There is an article that caught my attention.  It’s from June of 2009 in the Bloomberg Businessweek.  http://www.businessweek.com/investor/content/jun2009/pi20090615_088345.htm

This article is by Nikola G. Swann who is the primary credit analyst for the rating decision.  The article was about why the United States still had a AAA rating status.  One thing caught my eye, so I compared what he said to the current document about why they changed the rating status.  Here is the most important part of that document.

Why does Standard & Poor’s continue to view the U.S. as a AAA credit?

We believe the U.S.’s key credit strengths include:

• A high-income, highly diversified economy, with unusually flexible labor and product markets.

• The unique advantages associated with the U.S. dollar’s preeminent role as the world’s most used currency.

• The country’s openness to trade and capital flows and experience in adapting to associated fluctuations.

The country’s stable political system with strong, long-established institutions, its ability to respond to changing economic and financial circumstances, and its transparency in policymaking.

However, this is the part that really caught my eye.

Still, we believe that the fiscal outturn in the U.S. will be somewhat better than that in the U.K. because of what we view as the greater diversity and, consequently, resiliency of its economy. We expect that the U.S.’s net general government debt will rise to about 90% of GDP by 2013; we expect that of the U.K. to rise to nearly 100%.

It’s the 90% by 2013 of GDP that I found interesting.  If you go to the current document, in one scenario the 90% is met at 2015 and 101% by 2021 and in another 77% by 2015 and 78% by 2021.  Obviously, one is the downside and one is the upside scenario.  The document than goes on to compare what S&P deems to be similar countries to the USA and why they made a rating change.   The country that stands out is Canada.  Of course we are friends with Canada and there are always comparisons to be made.  However, I will point out here that there is a huge difference between our populations.  Canada has nearly 34 million and we have over 307 million.  The debt to GDP ratio for Canada is much lower than any of the other countries and is listed at 30% of GDP.  I found this interesting considering the fact that Canada has universal health care.  Their taxes aren’t crazy really and they don’t even tax lottery winnings. http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html

They have oil reserves that are second only to Saudi Arabia.  That’s something I didn’t know.  They also rely on the United States for both import and export business.  I n 2009 73% of their exports were to the USA and 63% of their imports were from here.  So, you might be thinking how does this all tie together?  In the document that explains how the S&P came to their decision they said this:

We have changed our assumption on this because the majority

of Republicans in Congress continue to resist any measure that would raise

revenues, a position we believe Congress reinforced by passing the act.

They also said this:

The political brinksmanship of recent months highlights what we see as

America’s governance and policymaking becoming less stable, less effective,

and less predictable than what we previously believed. The statutory debt

ceiling and the threat of default have become political bargaining chips in

the debate over fiscal policy. Despite this year’s wide-ranging debate, in our

view, the differences between political parties have proven to be

extraordinarily difficult to bridge, and, as we see it, the resulting

agreement fell well short of the comprehensive fiscal consolidation program

that some proponents had envisaged until quite recently. Republicans and

Democrats have only been able to agree to relatively modest savings on

discretionary spending while delegating to the Select Committee decisions on

more comprehensive measures.

From my viewpoint it looks like politics got in the way of everything.  Some people think that this was political because of S&P alone.  I don’t know about that.  This document might explain something about their influences.  http://influenceexplorer.com/organization/standard-poors/69ef116db51541288f82666a423a5fe5

It appears that some of the people and their families that work for S&P have given more to Democrats than Republicans.  As you scroll down, you will notice S&P contracts with the federal government.  I don’t know how any of this ties together, but I’m sharing it here because it might be important as a matter of disclosure.

The truth is we have been on a downward spiral for years.  We have spent money on two wars that was essentially borrowed money.  We were told early on that the Iraq war would be paid for by Iraq oil reserves or some such nonsense.  The military has basically doubled in spending and while doing all of this, we did not sacrifice anything other than our young people who gave so much for these wars!  While our soldiers were giving their lives and limbs, back home we were embracing the Bush tax cuts.  In each of our states we have witnessed the problems associated with all of this.  As the federal government put more in the wars, we received less in our respective states.  Many states are hurting and a good reason they are hurting is the lack of funds.  Cuts have been made across the country.  This year is unprecedented in the cuts that many states are facing.  The cuts that are most personal to me are those to education.  To me, educating our people is extremely important for the future growth and stability of our country.  An uneducated electorate is dangerous.

I sit here frustrated by a president and Congress that can’t seem to do what is necessary for the betterment of our country.  Get us out of these wars, including Libya, and get rid of the Bush tax cuts!  However, the most important thing our government should do is a jobs bill.  Certain states get an influx of cash from the federal government in the form of disaster relief.  Texas received $74,523,000 for hurricane Rita alone.  http://www.hud.gov/news/katrina05response.cfm

I feel Michigan and many other states have economic disasters that are never addressed quite like those states that have floods, hurricanes, and tornadoes.  Our whole country needs some disaster relief to rebuild the shambles from the economic disaster left from the loss of the manufacturing jobs.  In my mind, if we build it, they will come.  Just like in the movie, “Field of Dreams”, we should build our country up.  We should fix our infrastructure, transportation, and bring broadband everywhere in the USA.  We should not be cutting money from education but infusing money into education to get every student prepared for 21st Century jobs.  If we do this, we will make this country a better place for business and growth.  Everyone will win from this scenario.  Yes, if we build it, they will come.

Here is some food for thought.  I think if the Republicans hadn’t taken over the House of Representatives, we wouldn’t have received this rating.  In fact, we will never know, but I believe the stock market would be far more stable.  Prior to the Republicans taking over the House, the stock market was coming back.  Things were picking up some.  I was happy to see my personal portfolio coming back.  However, when the Republicans came in, everything changed.  Everything constricted in government from money to jobs.  The FAA even had to furlough people because decisions couldn’t be reached.  Jobs were held up because decisions couldn’t be made.  Representative Boehner and the Tea Party may be standing by their convictions, but I say at the detriment of the entire country.  I say shame on the Tea Party Republicans for letting our country down and shame on President Obama for treating this deficit debate like a political game as well.  After the debate all we heard from the pundits is who won and who lost.  It’s obvious the American people lost and no one could possibly consider these politicians to be winners!

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