US loses AAA credit rating: Tea Party to blame.

Protestors at the Philadelphia Tea Party on Ap...

Image via Wikipedia

Reports indicated below appear to be true. See the following link for further information.

http://t.co/ISRagjI

If the report on the following links are correct, then S and P have downgraded  the US Credit rating to AA-plus

 http://www.chron.com/disp/story.mpl/ap/top/all/7685541.html

http://www.usatoday.com/money/economy/2011-08-05-s-and-p-downgrades-credit_n.htm

=============================================================

It would not be fair to put this weeks stock market falls entirely at the feet of the Tea Party, but on the other hand it would not be fair to exclude their influence. Crisis’s of all kinds are built on underlying instability, but they are triggered by immediate factors.

It is clear that the mess created by the sub prime market fiasco, which exposed $10 trillion, of unsecured debt within the American Banking system, equivalent to the US public debt at the time. I don’t know what proportion of US Banks had to be bailed out but I have certainly seen numbers of 70 or so US banks being essentially bought out by the US Government. This then spread through Europe bringing down the entire Icelandic Banking system, and crippling other European banks right left and centre. The Only UK Bank to escape being partly or wholly bought out by the government was HSBC, which is the second largest company in the world according to the Forbes 2000 list, so a lucky escape there then.

The Sub-Prime crisis has left a legacy of instability in the European banking system, with governments the only organisations of sufficient size to be able to contain the problem by buying out banks wholesale. Essentially this has created a situation in Europe and America, where banking is for all intents and purposes a government rather than a private concern. With a few lucky survivors not tangled up in the sub prime market, or so large they could write off the losses and re-invest elsewhere.

This instability has highlighted the scale of public debt, (The money governments borrow to meet their obligations) in western economies. In the US this is 100% of GDP, in Greece it is between 100% and 120% of GDP, in the UK about 53% of GDP. (Yes I know I got this wrong in a previous post, but I am learning.) Markets seem to be somewhat unsettled by this, personally this seems to be more concerned with uncertainty about how the Euro zone will manage large sovereign debt in one or more states, when other less troubled states will be expected to pay for it. Currently a plan appears to be in place, though the markets attention appears to have shifted from Greece Spain and Ireland and focused on larger economies such as Italy as a source of anxiety. The numbers here seem to be of an order of magnitude lower than the numbers bandied about in the crisis of 2008, rather than Trillions of Dollars, reporting seems to be discussing Hundreds of Billions of Dollars.

Now the in’s and out’s and ups and downs are not particularly important, the important fact is that the situation is unstable, volatile and unpredictable. And some commentators have suggested that rather than the Euro being at risk it is the US dollar that is likely to suffer most. Eg Axel Merk in an article in the Financial Times (Dollar in graver danger than the euro The Financial Times, 11 May 2011.)

Into this unstable situation weigh the Tea Party, on the subject of the US public Debt ceiling, and an approaching deadline, with the US AAA credit rating at risk. Taking a very hard line particularly on taxation (The US has one of the lower personal tax rates in the developed world, though it‘s corporate taxation levels are among the highest, assuming corporations don‘t avoid them in some way {Big powerful companies wouldn‘t do that would they, surely?}) The Tea party also takes it into it’s head to try and force a second crisis before the next presidential election, for what seems to be nothing more than political reasons.

Ultimately, this all sorts itself out, and from this side of the water at least it looks suspiciously like at their potential moment of triumph, the Tea party fails to notice that it has made some serious gains, and keeps holding out for a grand slam that was never on the cards. Ultimately it gets sidelined by moderate Republicans, who get together with the Democrats and pull together a last minute deal, whilst the Tea Party sits on it’s hands refusing to play until everyone else lets it make the rules. The deal is done, the US AAA credit rating is saved, and everyone lives happily ever after.

Except of course that this isn’t a movie and they don’t.

What happens is real life, and in the real world the deadline is just an artefact of US government systems. What has really happened is that the US AAA credit rating is shot to hell, even before tuesdays deadline there were rumblings that the rating was pretty much dead anyway, Standard & Poor’s, are still seriously considering downgrading the US’s AAA status formaly.

http://www.businessweek.com/magazine/can-the-us-retain-a-aaa-rating-08042011.html
But this is not the worst of the problems created for the US economy, worse is that the AAA credit rating has for all practical purposes already gone. This is the reason the Markets have fallen so significantly over the week, the markets have lost confidence in the worlds largest economy’s ability to meet it’s obligations. The Market doesn’t know if next time the Tea Party will manage to exploit the system to create a crisis just for political advantage, and to hell with whoever else it hurts.

It seems to me that the Tea Party chose a very poor time and place to fight this particular battle. To some extent in the short term they have made political gains, and I am sure that the anti-tax, smaller government agenda they have pursued will play well with certain sections of US society. I find it hard to believe however that in the longer term that the impact on the US economy, of the markets loss of confidence will not ultimately fall at their door.

The US has a big mortgage, it needs paying. Cutting waste, is a good thing almost no matter what. Reducing government has it’s attractions, but where when and how are perhaps important questions to ask. Is it a good time to take government money out of the economy? Will taking money out not reduce economic growth? As growth slows won’t people lose jobs, reducing the economy further.

Nobody likes paying taxes, but in the modern world they are a fact of life, surely in an economy where personal taxation is relatively low, it would make sense to expect a little more from those who can afford it. Putting their money to work for the good of the economy as a whole. Reducing the public debt where possible, and preserving economic growth and feeding it where practical. Keynsian economics worked post WW II, restoring the European economy quickly and feeding the growth of the American Economy. Taxation in the US has been stable and relatively low since WW II, isn’t a global economic crisis the time to be thinking in terms of how the future can be secured, rather than in terms of short term political gain. Wouldn’t a big government investment in something like a big public service create jobs, increase tax revenues, and fuel growth. You know the sort of thing, universal health care would do the job nicely.

The Tea party are not to blame for the recent fall in markets, they merely exasperated the conditions to the point where it was inevitable rather than avertable.

From my point of view the Tea Party is a reactionary movement, the clue to the problem they present is in their name, they want to take America back to late eighteenth century economics, which is fine by me, just so long as they don’t drag the rest of the world back there with them, and if they do damage world wide growth significantly, the rest of the world will not hold them to account for it, it will be the US which faces the music.

Advertisements

About Transremaxculver

An entirely fictitious username I created for posting on 'alt.religion.scientology', Scientology is something of which I am highly critical. For those of you who don't know, the Church of Scientology have a habit of making life very uncomfortable for even the most legitimate of critics, which is why this username is completely anonymous. Anyway I have become quite fond of this username, and although it has to some extent outgrown it's original purpose, I think a blog is perhaps the right place for me/it to continue to grow and develop.
This entry was posted in Political Economics and tagged , , , , , , , , . Bookmark the permalink.

One Response to US loses AAA credit rating: Tea Party to blame.

  1. Pingback: Soon To Be Official - Tea Party Crashes The US Economy | Homebrewed Theology

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s