…there a sliver of a silver lining ”” and an important one. America’s downgrade may serve as a wakeup call for its policymakers. It is an unambiguous and loud signal of the country’s eroding economic strength and global standing. It renders urgent the need to regain the initiative through better economic policymaking and more coherent governance.

There is a risk, of course, that different political factions will use S&P’s action as a vindication of their prior beliefs. Democrats would argue that it is recent Republican political sabotage that pushed S&P over the edge while Republicans would argue that we are here due to irresponsible government spending by the Democrats.

For the sake of their country and the wider global economy, both parties should resist the urge to begin bickering. Instead they should seize this potential “Sputnik Moment…”

Read it all.

Though Beijing has few options other than to continue to buy United States Treasury bonds, Chinese officials are clearly concerned that the country’s substantial holdings of American debt, worth at least $1.1 trillion, are being devalued.

“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers.

Beijing, which did not release any other official statement on the downgrade, called on Washington to make substantial cuts to its “gigantic military expenditure” and its “bloated social welfare” programs.

Read it all.

Standard & Poor’s announced Friday night that it has downgraded the U.S. credit rating for the first time, dealing a symbolic blow to the world’s economic superpower in what was a sharply worded critique of the American political system.

Lowering the nation’s rating to one notch below AAA, the credit rating company said “political brinkmanship” in the debate over the debt had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.” It said the bipartisan agreement reached this week to find at least $2.1 trillion in budget savings “fell short” of what was necessary to tame the nation’s debt over time and predicted that leaders would not be likely to achieve more savings in the future.

“It’s always possible the rating will come back, but we don’t think it’s coming back anytime soon,” said David Beers, head of S&P’s government debt rating unit.

Read it all.

The federal government is expecting and preparing for bond rating agency Standard & Poor’s to downgrade the rating of U.S. debt from its current AAA value, a government official told ABC News.

Although the Obama administration is preparing for the possible downgrade, it is not 100 percent positive it is going to happen, a second government official said, and if it does happen officials are not sure when it will happen.

Read it all.

Chinese rating agency Dagong Global Credit Rating Co. said Wednesday it has cut the credit rating of the United States from A+ to A with a negative outlook after the U.S. federal government announced that the country’s debt limit would be increased.

The decision to lift the debt ceiling will not change the fact that the U.S. national debt growth has outpaced that of its overall economy and fiscal revenue, which will lead to a decline in its debt-paying ability, said Dagong Global in a statement.

Read it all.

–”‹Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit.
–In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at “net present cost.”
–Aside from outright default, there are numerous ways a government can reduce its future liabilities. They include balancing the budget, unexpected inflation, currency depreciation and financial repression.

Read it all.

Wow–watch it all.

269 to 161

….the debate is a clear loss for America as a whole. Here’s how Christine Lagarde put it:

There was a positive bias towards the United States of America, towards Treasury bills. That was the case historically. And the current crisis is probably chipping into that very positive bias.

That very strong confidence that generally led to a flight to quality and investment in Treasury bonds is slightly eroded at the moment. I mean, it was unheard of, only six months, to imagine that the United States could be under negative watch by the rating agencies.

So here’s what I’m wondering: is there some way of quantifying the cost to the US of simply having this debate? Is there a way of taking Lagarde’s “positive bias” and giving it a number, in terms of say basis points of reduction on US borrowing costs?

Read it all.

President Obama and congressional leaders Sunday night sealed a deal to raise the federal debt limit that includes sharp spending cuts but no new taxes, breaking a partisan impasse that has driven the nation to the brink of a government default.

The agreement brings to an end a self-created crisis that has consumed Washington, rattled Wall Street, and shaken confidence in the American political system at home and abroad. The deal could clear Congress as soon as Monday night ”” barely 24 hours before Treasury officials have said they could begin running short of cash to pay the nation’s bills.

Passage of the agreement, however, remained far from certain in the House, where skeptical Republicans were just beginning to digest the details….

Read it all.

Sources familiar with the outlines of the deal say it would raise the debt limit by about $2.7 trillion and reduce the deficit by the same amount in two steps. It would cut about $1 trillion in spending up front and set up a select bicameral committee to put together a future deficit-reduction package worth $1.7 trillion to $1.8 trillion.

Failure of Congress to pass the future deficit-reduction package would automatically trigger cuts to defense spending and Medicare. An aide familiar with the deal said the Medicare cut would not affect beneficiaries. Instead, healthcare providers and insurance companies would see lower payments.

Read it all.

Senate Majority Leader Harry Reid (R-Nev.) instructed senators to stay close to the Capitol Sunday afternoon as a deal was being furiously negotiated among congressional leaders and President Obama.

Read it all.

The Senate voted largely along party lines on Sunday afternoon to block legislation crafted by Senate Majority Leader Harry Reid (D-Nev.) that would raise the debt limit by $2.4 trillion.

Reid and other Democratic leaders worked intently to persuade centrist Republicans to support the plan but fell short.

The vote to end a GOP filibuster failed 50-49. Only Sen. Scott Brown, a centrist Republican from Massachusetts, defied the GOP leadership.

Read it all.

Update: More from Marketwatch there.

In many respects, the deal will, if approved by all parties, resemble the contours of a short-lived pact negotiated last weekend by House Speaker John Boehner, R-Ohio, and Senate Majority Leader Harry Reid, D-Nev. Obama rejected that deal, forcing Congress to wrestle with other inferior legislative options throughout the week.

Among the newest wrinkles, according to informed sources, is an agreement to extend the current $14.3 trillion debt ceiling very briefly to give the legislative process time to work without resorting to emergency, hurry-up measures.
President Obama has said he would only sign a short-term extension (days, not weeks) if it were linked to an extension of borrowing authority that lasts beyond the 2012 election.

Read it all.

Tea Party activists in and out of office, including 1st District Rep. Tim Scott, have been demanding more spending-cut assurances than House Speaker John Boehner can deliver on the debt accord. They should realize that with Democrats still controlling both the Senate and White House, they can’t get everything they want this time around.

Tea Party folks also should realize that unless the debt ceiling is raised in time, the immediate bottom-line consequences could include a federal default and U.S. credit-rating downgrade.

Of course, even with a debt deal, the nation still faces serious financial risks — including a credit-rating demotion. Fortunately, next year’s presidential and congressional elections will give voters another chance to send the message that Washington can’t keep spending so far beyond our means.

Read it all.

Bloomberg TV played this from time to time recently, and it helped a bit. Check it out–KSH.

If leadership is the capacity to take people where they need to go ”” whether or not they realize it or want it ”” then we’ve had almost no leadership in these weeks of frustrating and maddening debate over the budget and debt ceiling. There’s been an unspoken consensus among President Obama, congressional Democrats and Republicans not to discuss the central issue underlying the standoff. We’ve heard lots about “compromise” or its absence. We’ve had dueling budgets with differing mixes of spending cuts and tax increases. But we’ve heard almost nothing of the main problem that makes the budget so intractable.

It’s the elderly, stupid.

By now, it’s obvious that we need to rewrite the social contract that, over the past half-century, has transformed the federal government’s main task into transferring income from workers to retirees. In 1960, national defense was the government’s main job; it constituted 52 percent of federal outlays. In 2011 ”” even with two wars ”” it is 20 percent and falling. Meanwhile, Social Security, Medicare, Medicaid and other retiree programs constitute roughly half of non-interest federal spending.

Read it all.

Take a look.

The nation’s Roman Catholic bishops are urging the GOP-led House to reject a cuts-only approach to the budget as Washington tries to avert an unprecedented government default on its multi-trillion-dollar debts.

“A just framework for future budgets cannot rely on disproportionate cuts in essential services to poor persons,” wrote Bishop Stephen Blaire of Stockton, Calif., and Bishop Howard Hubbard of Albany, N.Y., in a Tuesday (July 26) letter to House members.

Read it all.

That’s why the posturing about whether and how Congress should increase the debt ceiling by Aug. 2 has been a hollow exercise. Failure to increase the borrowing limit would harm American prestige and the global financial system. But that’s nothing compared with the real threats to the U.S.’s long-term economic health, which will begin to strike with full force toward the end of this decade: Sharply rising per-capita health-care spending, coupled with the graying of the populace; a generation of workers turning into an outsize generation of beneficiaries. Hoover Institution Senior Fellow Michael J. Boskin, who was President George H.W. Bush’s chief economic adviser, says: “The word ”˜unsustainable’ doesn’t convey the problem enough, in my opinion.”

Read it all.

Both bills cut discretionary spending by about the same amount, roughly $1.2 trillion depending on which benchmark is used. Both set up a bipartisan fiscal commission with special powers. Neither raises taxes, or significantly changes entitlement programs.

Mr. Reid’s bill contains a little bit more deficit reduction by cutting agricultural subsidies, selling radio spectrum licenses and improving I.R.S. enforcement. Its savings are also somewhat more front-loaded, with deficit reduction of $30 billion in 2012 as compared with $1 billion for Mr. Boehner’s, although the speaker’s bill is being rewritten.

Most of the difference in their price tags, however, has to do with the fact that Mr. Reid’s bill would count $1 trillion from the winding down of the wars in Afghanistan and Iraq as deficit savings, while Mr. Boehner’s would not ”” a matter of accounting rather than a substantive difference.

Read it all.

Should America embark on such fiscal contraction at a time when economic growth has already slipped to stall speed, and debt deleveraging continues with a vengeance, I would like to flee to Mars for safety.

Yes, there is such a concept as an “expansionary fiscal contraction”, as in Ireland (1980s), Denmark (1990s), arguably Canada (1990s), and the UK after both 1932 and 1993, but in every successful case this was accompanied by monetary loosening. That card has already been played this time.

Should America instead opt to evade these fiscal cuts by actually defaulting on debts accumulated by self-indulgent baby boomers, I would also like to flee Mars because such an outcome might be even worse.

Read it all.

Today’s spectacle of a dysfunctional Washington, unable to tend to even its most basic task of protecting the nation’s financial standing, may be appalling. It should not, however, be a surprise.

he inability, after eight months’ warning, to agree on any plan to deal with deficits and raise the nation’s debt ceiling isn’t some freak accident. Instead, it is the logical culmination of two giant trends in American politics: an unresolved debate over the size of government and the growing hyper-partisanship of Congress, particularly the House of Representatives.

Put those two together and you end up with leaders of the two parties speaking, as they were over the weekend, of the need to “defeat them,” as if the two parties were Cold War adversaries rather than partners in running the same nation. President Barack Obama, in a nationally televised speech last night, bluntly acknowledged how bad the picture looks to his countrymen, and to the world: “The American people may have voted for divided government,” he said, “but they didn’t vote for a dysfunctional government.”

Read it all.

[In the 1950’s] the federal safety net designed for a time when unemployment was 20 percent and stockbrokers were jumping out of windows was still there. Not yet unmanageable, still a small fraction of the federal budget, still considered a lifeline for the desperate and a retirement income supplement for the rest.

Then along came the tumultuous, iconoclastic, game-changing 1960s….

In 1965, Medicare and Medicaid began paying medical expenses of the retired and those who could demonstrate “need.” Human nature being what it is, two things happened. First, those who could demonstrate “need” availed themselves of free medical care far beyond any level they would have used had they been required to pay for it. Second, given virtual carte blanche by the government, hospitals and other medical providers jacked up their prices in breathtaking fashion….

And voilá, our citizenry became entitled to medical care and a retirement income no matter what the cost. The more they got, the more they wanted…Now their time is up.

Read it all.

The biggest share of federal spending now goes for Social Security (20.4 percent in 2010) and Medicare (13.1 percent), the two entitlement programs that big majorities of Americans want to protect from any reductions, according to a recent poll. Together these two programs for senior citizens consume more than one-third of spending, far more than national defense, which accounts for just 20.1 percent, despite the increases of recent years….

Who pays all of these taxes? The best information on that comes from the Congressional Budget Office, which has tracked the tax burden for many years. The most recent complete data cover 2007. CBO figured in that year more than half of all federal taxes was paid by the top 10 percent of income earners. They paid 55 percent of all federal taxes in 2007, CBO said.
That’s a comprehensive figure, counting the income tax, payroll taxes, excise taxes and even the corporate income tax (borne by stockholders in the form of reduced dividends and appreciation). And perhaps surprisingly, the top 10 percent of earners pay a greater share of federal taxes now than they did before the Bush tax cuts, which Democrats constantly criticize as a giveaway to “the rich.” The top 10 percent paid 50 percent of all federal taxes in 2001.

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House Speaker John A. Boehner and the Senate majority leader, Harry Reid, were preparing separate backup plans to raise the nation’s debt ceiling on Sunday, after the leaders were unable to end an increasingly grim standoff over the federal budget.

The dueling plans emerged as lawmakers appeared to miss a self-imposed deadline of 4 p.m. Eastern time to cut a deal before markets open in Asia. And at about 6 p.m., President Obama began meeting with Mr. Reid and the House Democratic leader, Nancy Pelosi, in the Oval Office to discuss the Reid proposal.

Mr. Reid, the Senate’s top Democrat, was trying Sunday to cobble together a plan to raise the government’s debt limit by $2.4 trillion through the 2012 election, with spending cuts of about $2.5 trillion. He would seek to avoid cuts to entitlement programs, but it was unclear how those savings would be achieved.

Read it all.

House and Senate negotiators have not reached a deal that would lift the nation’s debt ceiling just hours before markets in Asia are set to open ”” a test of whether Washington political dysfunction is beginning to shake the global economy.

House Republicans are not able to reach a deal with Senate Democrats, said congressional sources, though staff-level negotiations are continuing.

And in a sign that talks with Republicans appear to be going sour, Senate Majority Leader Harry Reid (D-Nev.) began to draft his own legislation Sunday that would slash at least $2.5 trillion to match an extension of the nation’s borrowing limit through the 2012 election, leadership aides said.

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There is great disagreement in Washington over the meaning of last year’s midterm elections, but it’s almost certain that most Americans did not vote for the kind of paralysis that now surrounds the negotiations over the terms of raising the debt ceiling.

Americans voted for, or got, divided government because the public doesn’t fully trust either party with the reins of power. That means the only way out of this problem is through compromise, or what one administration official called “bipartisanship by necessity,” not by choice.

Up until now, enough lawmakers haven’t been ready to accept that in order for a deal to be struck. So the clock ticks.

Read it all

This medicine is very hard for Americans to swallow, but the truth is, we can’t have it both ways. We want an arms-length relationship with the government in good times. In bad times, the cries go out to “do something,” even if it’s pay us to do nothing. We want a free-market economy during expansions, a nanny state in periods of recession. Privatized profits during the boom, socialized losses during the bust.

–Caroline Baum, in a Bloomberg News piece this week