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Yet once again, conflicting assessments on what may occur in the short-term were evident on that side of the world as well. “Because the U.S. market remains the most liquid and deepest and as Europe still faces uncertainty, the U.S. market is not likely going to experience a huge sell-off, even with the one-notch downgrade,” wrote Philippine central bank Governor Amando Tetangco in an emailed statement. Thomas Lam, Singapore-based chief economist at OSK-DMG, disagreed. “This is clearly a wake-up call for the U.S. and those who think a downgrade doesn’t matter are in denial,” he said. “Markets will enforce their discipline if the U.S. doesn’t repair its credit rating.”
David Beers, head of S&P’s government debt rating unit, reflected on that possibility. “It’s always possible the rating will come back, but we don’t think it’s coming back anytime soon,” he warned.
The move by S&P made the ratings agency itself a target for criticism as well. “I really find it quite amazing that a credit agency that could rate mortgage backed securities AAA has decided to downgrade the U.S. government,” said Greg Salvaggio, senior V.P. of Tempus Consulting. “I find it to be incredibly troubling from a ratings agency with a very terrible history in the last three years of its ability to quantify risk,” he added. Dean Popplewell, chief currency strategist at Oanda in Toronto, concurred. “No one expected [S&P] to do it,” he said. “They made sure Monday will not be boring!”
As of now, the other two major ratings agencies, Moody’s and Fitch, will maintain a AAA outlook on U.S. credit. But Moody’s has also lowered its outlook on U.S. debt to “negative.”
Senator Mark Kirk (R-IL) called on President Obama to cancel Congress’s August recess and bring lawmakers back into session to specifically address the concerns outlined in the S&P’s analysis. Yet as of early Saturday, there was no statement from the president, who met with Treasury Secretary Geithner on Friday before heading to Camp David for the weekend. Prior to the downgrade on Friday, the president spoke at Washington Navy Yard, where he announced a jobs program for veterans, aka more government spending. “We are going to get through this,” he said. “Things will get better. And we’re going to get there together.”
Perhaps we will. But considering this president never misses an opportunity to engage in rank partisanship, and has never submitted a serious — as in written down — budget proposal of his own, one is left to imagine what form such togetherness might take. As for the political parties themselves, it remains to be seen which worldview will gain the upper hand. And while the devil is in the details, there is no question cuts must be made. There is also no question addition revenue streams must be found.
The best of both worlds? On the cut side, a serious re-evaluation about the size and nature of government itself. Many Americans have lost sight of the reality that government functions best from the local level outward, not the national level inward. The monumental amount of waste that occurs in a process which essentially involves the states sending money to Washington, only to have Washington send it back, can no longer be tolerated. The monumental immorality of a country in which half its population is tethered to a government underwritten by the other half must also be addressed.
On the revenue side, fundamental tax reform, as opposed to class warfare, must be undertaken. Eliminating loopholes is a no-brainer, both economically and morally, as it will give Americans the sense that everyone is paying their “fair share.”
More importantly, the pie itself must be made larger. There is no viable substitute for putting more Americans back to work. And despite what many Americans might believe, brow-beating the wealth-producers, as opposed to providing them with incentive, is a fool’s errand.
Lastly, every reasonable American must recognize that the way we have conducted our affairs is no longer sustainable. This is one American who would like to live long enough to see a debate about raising the debt ceiling become a moot point, with a government spending no more than it takes in, with all increases in that spending limited to a fixed percentage of GDP. One in which any spending deviation for national emergencies would require a two-thirds vote of approval by Congress.
On Saturday, China’s state-run newspaper, Xinhua News Agency, explained exactly what our current dilemma necessitates. “To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means,” it said.
Right now the country still has the power to re-establish common sense principles. But Americans should make no mistake: if we continue to kick the fiscal can down the road, common sense principles will be imposed on us, not by us.
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