Another Shocker (or no big deal?)

The shocks to the financial system are coming fast.  Last week it was the University of Texas announcement they were loading up on gold bullion.  Today Standard & Poors downgraded the outlook of the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.  In short, we owe oodles of cash and have not taken steps to reduce debt.  The rating agency wants to see a credible solution to the deficit problem within two years or they will pull the plug on our AAA credit rating. 

 

Almost immediately (they were clued in before the Standard & Poors announcement) the shoot the messenger crowd fired back.  Austan Goolsbee, chairman of the Council of Economic Advisers, characterized the S&P move as a "political judgement."  Treasury Assistant Secretary Mary Miller stated the downgrade "underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation."   Obviously Mary hasn't been watching the Sunday morning political talk shows where dumb asses from both parties only take cheap shots.  Will the downgrade jump start fiscal responsibility in Washington or be ignored like other warnings.

 

Over at the Market Ticker  Karl Denninger is of the view that given the outlook downgrade, Congress is trapped and has to knock off the deficit spending now, not in 30 or 40 years.  If Washington fails to take action now, we will lose our AAA credit rating and truly bad things happen.  Spam for dinner anyone?

 

Others believe it is impossible to stop government deficit spending and debt monetization.  Really, who will buy our debt besides the Federal Reserve?  Others like Graham Summers say austerity is not in the cards as interest rates can't be allowed to rise given the affect on banks holding trillions of dollars of interest rate sensitive derivatives.

 

With so many dependent on government largess of one form or another, I believe the likelihood of this country embracing austerity to voluntarily reduce the deficit is zippo.  That ship has sailed.  We will ignore this outlook downgrade and we will ignore all future warnings.  You see, if a treasury agent comes into your home and demands you hand over the new home theater system and a third of Grandma's medicaid money to reduce the deficit, you're going to get upset.  Politicians don't like to upset voters, so this won't happen.  Politicians will try to achieve the same result via price inflation and hope you don't notice.