US Debt Crisis Just Beginning

Last modified on August 3rd, 2011

The senate passed the deal to raise the debt ceiling today, which means the United States can pay their bills and not default. But truthfully, that’s probably the worse thing that could have happened, since the US has delayed dealing with some very hard problems.

First, let me comment on the ratings agencies. Right after a deal was announced, two of the three major rating agencies reaffirmed the United State’s AAA credit rating. These are the same ratings agencies that also gave AAA ratings to the credit default swaps and other securities that were the underpinnings for the 2007-2008 financial crisis. Saying the United States is in good fiscal shape is like saying Icarus was the world’s best astronaut.

S&P hasn’t weighed in on their rating yet, but I suspect they’ll give a AAA rating as well. It doesn’t really matter – either way the markets have reacted negatively and are punishing US stocks.

I came across this video tonight, and I agree with almost all of it. The only part I don’t agree with is that the Euro is the only currency that can compete with the USD – several proposals involving a basket of currencies have gained a notable following, and I imagine that’s what will eventually take the place of the US dollar.

If the US didn’t have reserve currency status, they would be no better than Greece or Spain, and we would be treating them the same. All they’ve done with this current effort is to kick the can down the road, and it will be undoubtedly a harder problem to solve when it is addressed. And let’s not forget that this whole debacle was basically dealing with the current deficit, the actual debt hasn’t even been discussed yet.

I agree with Peter Schiff: the crisis wasn’t that the United States wouldn’t raise their debt ceiling, it’s that they would. Now they have repositioned themselves to head down the same path that other countries like Argentina and Zimbabwe have traversed, and in both of those cases, the currency and the economy were destroyed in the process.

** Update – China announced they have downgraded US debt. Thankfully their ratings agencies aren’t as clueless at the US ones. Guan Jianzhong, chairman for the Dagong Global Credit Rating Company, has this to say:

“The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States’ declining ability to repay its debts. The two parties acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals.

Our downgrade simply reflects reality. Our rating didn’t cause China to lose any money — it was the inappropriately high ratings for the U.S. by Western agencies that had led China to make risky investments in U.S. debt.”

7 responses to “US Debt Crisis Just Beginning”

  1. Paul says:

    If they never had the Federal Reserve Bank and stuck to printing their own money this would have never happened.

    The faster the FED is out of the country there along with the IMF the quicker they will recover. Until then all we can do is wait and watch as the USA goes in to death throws trying to keep their head above the water.

  2. Duane Storey says:

    The Fed has been there for almost 100 years, I don’t think it’s going anywhere. But you’re right, it’s partially responsible for devaluing the dollar. But don’t forgot, it was often to monetize the debt, which a completely impartial monetary body (which the Fed was supposed to be) shouldn’t have done. But the Fed caved to political pressure when it shouldn’t have. By simply inflating away the government’s debts, the Fed has introduced moral hazard into the system – the government hasn’t had to deal with the financial consequences of its actions.

    I don’t think they can recover. The US just spent a month trying to reduce the deficit by a small amount. I can’t even imagine how ugly this will get when they attempt to address the debt. You can’t look to the rich to bail out the country. Even if you could impose high taxes on them, the world isn’t like it used to be – rich companies and individuals don’t just stay put, they’ll simply leave and move somewhere else that’s more affordable. Governments can no longer rely on the next generation to pay the bills for the current one.

  3. That’s a really good point about the rich moving somewhere else.. something I never really thought about. I think it’s also relatively easy for those people to setup foreign registered businesses and bank accounts for their money, which would allow them to continue living in the US, but without being considered a high income earner.

    I’d be curious to know how far they could reduce their deficit if they simply legalized marijuana (releasing marijuana related convicts from prison and taxing the stuff) and increasing taxes on gasoline to prices more similar to the rest of the world. Just those two things alone could probably cut their deficit by a massive amount :).

  4. Duane Storey says:

    In Canada that might work, but the IRS in the US will track down your assets anywhere in the world and try to lay claim to them.

    I think legalizing Marijuana would help a bit, but the real issue is with the unfunded entitlement programs (social security, medicaid, etc). The US has probably been hoping they can “grow” their way out of the problem, but that hasn’t worked because each administration has continued to pile on more debt that the growth of the economy.

    I think they’re screwed.

  5. Oh, they’re definitely screwed, no question about that. Even if one party decided to make drastic cuts, they’d just get voted out the next term because another party will promise to bring back the services that were cut. And I don’t think enough americans are educated enough to know better.

  6. Duane Storey says:

    Unfortunately it all falls to the middle and lower classes, and they are the ones that should really have to pay the least amount of the burden. The solution is simply not to get into this mess, but it’s too late for that now.

  7. Duncan says:

    The U.S. have been China’s bitch for some time now and they’re about to be bent over the barrel…
    Anything of any value that’s not nailed down will be bought and exported at fire sale prices by wealthy foreigners when the dollar collapses(which it will).
    Nukes were the weapon of choice, now battles are won on the balance sheets. The U.S. has exported almost all of its manufacturing and offers very little in the way of real tangible goods to the rest of the world.
    Intellectual capital is certainly valuable, but will only benefit a small percentage of their economy. Endless regulation and increasing red tape have and will continue to stifle new innovation in the U.S. Their educational system is also sub par and is failing to produce the rising stars it once did.
    Last one out turn off the lights! Unfortunately the middle class will become poor and God help them when the Gov’t benefits run dry.
    Look up Detroit on google maps and do a street view on some of the abandoned neighbourhoods there. I fear there will be many more communities like this all over the U.S. In the years to come.

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