by Karl Denninger, Market Ticker:
Note the nonsense from CNN on the “reason” for this action:
Fitch Ratings downgraded US long-term debt late on Tuesday from AAA to AA+, citing this spring’s debt ceiling standoff as a major reason.
That’s a huge blow to the US. The global financial system relies on the promise that the US government will always pay back its debts. That trust makes the US dollar the most widely held currency worldwide. This downgrade threatens to complicate that.
Really? The US will always pay back it debts? How, when the Federal Government is running a deficit of about one dollar in three?
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Think about this for 30 seconds: You have a $40,000 a year income in your family. Its pretty tight. So you spend $60,000. Every year. You start doing it when a virus closes your business and most people understand pulling out of the credit card when something terrible happens. But then the virus wanes, and you keep spending the same amount of money, and in fact you make all sorts of excuses for why. You don’t go back to spending $40,000, or $45,000. No, it must be $60,000 because you promised the kids four trips to Disney, and by God you’re going to take them.
“My sense is that the Fitch downgrade of the US credit rating is an insignificant development and will not move financial markets or the economy,” said Joseph Brusuelas, chief economist at RSM US. “As long as the Federal Reserve continues to treat US issued paper as AAA rated credit so will financial market participants.”
Well, perhaps. For some period of time. But for how long? You see, every one of those extra dollars creates inflation. This in turn means everyone gets screwed by that. If you demand more in pay then you just make it worse because now the government will borrow even more and the gap will expand further. If the government raises taxes you will again scream for more wages which of course will do the same thing — reflect back into prices.
We have created a monster in the system by promising people something for nothing. Politicians and pundits like to point to “entitlements” and they always include Social Security in the mix even though last fiscal year Social Security actually took in more tax than it spent! In other words that’s not the problem and even when it was it was a small piece of it — single-digit percentage shortages which means a very small tax increase, such as raising the cap on social security wages where the tax is collected, would balance it.
