The Market Ticker – Egan-Jones Rings The Bell (Again) |

Economy and News

From The Market Ticker

And here we go again…

Egan-Jones Ratings Co. cut the U.S. credit rating one step to AA, the second downgrade in nine months and two levels below its highest grade, with a negative outlook citing the nation’s increasing debt burden.

U.S. debt has increased to 100 percent of gross domestic product, while debt climbed 23.6 percent from 2008 to 2010, the credit-rating firm said in a statement today. Egan-Jones lowered the U.S. grade to AA+ in a July. Treasuries have gained 4.6 percent since the company first lowered the U.S. rating, according to Bank of America Merrill Lynch index data.

The downgrade was based on “the increasing debt load coupled with the fact that there has been no tangible progress in addressing the country’s growing debt to GDP” ratio, Sean Egan, president of Egan-Jones in Haverford, Pennsylvania, said today in a telephone interview. “Unfortunately, the debt is growing fairly rapidly while the GDP is not.”

The market ignored it.

The reason there has been no tangible progress on the nation’s debt-to-GDP ratio is found in the fact that about one out of every 10 dollars spent in the economy (that is, GDP) is money borrowed by the federal government and then spent. This creates an artificial level of demand in the economy and allows the government to claim that “we’re growing!”

But we in fact are not. In point of fact all we’re doing is inflating the debt bubble, just as we have for 30 years.

This chart is, very simply, the change in total systemic debt (from the Fed Z1) compared against the change in GDP. We get both numbers quarterly; one from the Fed and the other from the BEA.

Since all money is debt in modern monetary systems each new dollar spent into the economy must come with a debit somewhere (that is, it is someone’s obligation.) This means that we can very easily measure the total amount of monetary inflation — or deflation — by simply comparing those two figures.

The “fear factor” for Bernanke and Congress is that the deceptive practices of the last 30 years will be discovered for what they are. The so-called “prosperity” since 1980 has mostly been a scam — it has been nothing more than monetary inflation coupled with frauds that allowed people to borrow money they couldn’t pay. Under this cover all manner of sin was committed; two bubbles (Internet and Housing) along with the theft of every single dime paid into Social Security and Medicare.

It is not “deflation” to take that monstrous bubble from 1981 forward and let the air out of it. That would be nothing more than restoring balance, but it would not come “nicely.”

So instead we have pretended. To be blunt, we all lied. To ourselves, to each other, and the government lied to all of us. We see articles telling us that we “can’t” make “irresponsible cuts” to government spending but what was irresponsible was promising to spend money we didn’t have in the first place.

There is no cheap, easy or clean way out of this box. We will have to, at some point, accept the monetary, fiscal and economic contraction that must come to restore balance.

There are only two ways to do so:

  • Tell the truth. Some political party, whether the two major ones out there now or a third party, must get in front of this and start hammering the above graph until people ”get it.” It’s not hard to figure out really — gasoline prices anyone? Medical care? College education? Stocks? Just look — there it is. This means cutting the size of government to what we are willing to fund in the present tense with taxes. Everything else goes away. And yes, this means both material tax increases (e.g. recission of all of the Bush tax cuts) and really large spending cuts (like in half — across the board.)
  • Continue to lie. We won’t get away with it for much longer. Neither will anyone else. Spain is in real trouble on this account as is Portugal. The lies are politically expedient but that’s all they are. They’re not fundable; if The Fed continues to play its QE and “twist” games all that will happen is that the monetary debasement will show up in essential commodities. When a material percentage of the population can no longer afford to eat and the government is unable to continue to ratchet up the entitlements the game ends in violence and destruction.

The second choice is a bad one, but it’s the choice we make every single day we refuse to confront these realities and hold the politicians’ feet to the fire. Those who are currently in office should be held to account for their lies, their thivery and their willful blindness. All three have been equal components of the mess we’re in today.

Not only did politicians steal through the making of promises they couldn’t keep and monetary debasement but they willfully looked the other way while banking interests effectively counterfeited the currency and by doing so blew enormous bubbles in stock, commodity and housing markets. They all lied too about the quality of the debt instruments they were issuing to back this monetary expansion and they knew it.

I know there are plenty of people who think this game can go on for many more years or even decades. I disagree. So did all of the Simpson-Bowles conferees. Their expectations for the”wall” ranged from 2-4 years out — a year ago. Mathematically I don’t see how we get out of the 201x years; from a realistic market perspective you’ll never get close to the corner.

The fault is ours folks — not just the politicians. We get the government we deserve, as it’s the government we vote for.

For every day we refuse to rise and act the damage we must accept to restore balance grows worse. In 2000 I estimated we had to accept a 10% contraction in the size of the government and that GDP would likely have to fall around 5-10%. In 2007 I said it was 20% on the size of government.

Today it is nearly 50%.

Soon, it simply won’t matter as the choice will be made for us.

If you choose not to decide you still have made a choice!

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