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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Saturday, August 06, 2011

Credit rating agency cuts USA government debt rating....

The 1 notch downgrade from AAA to AA+ is not the end of the world. My opinion, this change is reflective of the profound difference between the obligations that the US central government has promised to pay and what it has the potential to collect in taxes. These are completely out of balance and will eventually lead to a default of debt obligations of the nation. This is the path that the nation is on and this downgrade is reflective of this path.

The administration of the Obamessiah in a juvenile CYA move is claiming that the rating agency made a $2 trillion error in its calculations and there were last minute negotiations with the rating agency over this. This obviously did not impress the rating agency that sees that there is very little seriousness in even the recent battle over cutting spending.

Consider these things in the recent budget battle; The increase allows the government to immediately increase borrowing by $400 billion. Then in a few months another $500 billion can be borrowed. Starting in October 2012 the government will cut spending by $917 billion over ten years, but only $21 billion is cut in fiscal year 2012 that starts October 1, 2011. The spending cuts come from discretionary spending, which does not include Social Security, Medicare, or Medicaid. The rest of the cuts come later after the economy has supposedly started to grow at a more rapid clip. Hardly any spending cuts occur before 2014. A Congressional committee will be formed right away and will consist of 6 Republicans and 6 Democrats. They will supposedly find another $1.5 trillion in spending cuts by Thanksgiving and the deal will be given a thumbs up or down vote by Christmas. If the deal does not pass then automatic spending cuts of $1.2 trillion, mostly from defense and domestic programs, will kick in. However, Medicare, food stamps, unemployment insurance, and Social security will not be part of the automatic cuts. Lest we not forget, Medicare, Medicaid, income support, and Social security are where the really big spending occurs (60%).

The above is truly an underwhelming plan. There are no true cuts in spending since the outsized spending is happening right now. The 'plan' is to cut future spending growth and not actually cut spending. Its a stupid and silly way to manage a country's finances.

The USA will never be able to get its spending under control and further downgrades will happen over the coming years. But this will not impact as many in the media and Obamessiah itself as they have argued that rates on mortgages and credit cards will rise. Rates will rise almost imperceptibly over the coming future but the largest impact on be on the rates that US central government will definitely rise. There will be market dislocations since those investors that have limitations on what they can buy or hold to only AAA securities, will not be able to hold US treasury securities and there are just not enough other securities in existence to meet these needs now.

Brace yourself for downgrades in the future and a government that will be strained to fund itself at the incredible levels of borrowing that it requires and the amount of debt everywhere that it has to refinance. We will have a time in the coming years where a US treasury auction will fail and the hard reality of truth finally reaches the insulated prima donnas that populate Washington and the whole nation ends up suffering.

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