Downgrade This

As if on cue, Standard & Poor’s downgrades US debt. Yet another historic achievement for El Presidente. If you’re thinking about buying anything on credit, now would be a good time to lock in your rates.

It remains to be seen how far-reaching this will be. Supposedly Moody’s and the other big agencies aren’t budging, which I suppose would help. And while I think our problems are quite serious, this decision also smacks of politics.

Why’s that? Recall that S&P got burned pretty bad in the 2008 mortgage meltdown, by not downgrading clearly insolvent lenders until it was too late. Plus this quote from the linked story:

“S&P added that it expects that the upper income Bush-era tax cuts will continue, despite vows from Obama to end the breaks next year.

‘The majority of Republicans in Congress continue to resist any measure that would raise revenues,’ the firm said.”

So are they choosing sides? I wouldn’t put it past the Post to insert their own biases and flat-out make stuff up, but that would be pretty brazen. While there’s also more talk about cutting spending, you can bet that comment will be used to bludgeon the Republicans. I hope they’re prepared to fight back.

If they’re smart (always a question), they’ll use this fact to their advantage. We can’t soak the rich enough to balance our budget. Confiscate everything they make and it wouldn’t do it. And it would wreck the economy (how hard are you going to work if you know the Feds are going to take every dime?). That might make the social-justice crowd feel better, but the math is not on their side.

It also presumes that all government spending is somehow justified, and cannot be cut to the necessary degree. Therefore, we must fund it.

Sorry, I’m not buying it. And the way things are going, I may not be buying much of anything.

UPDATE: China weighs in. Among other things, our single biggest creditor demands “substantial cuts” to military spending. Surprise!

Hitting the Ceiling

I’ve tried to make it a point to avoid politics on this blog, because, quite honestly, I’m trying to build up an audience for my forthcoming novels. It turns me off when my views are openly insulted on other author’s blogs, so rest easy knowing I will strive to not do that here.

The exception to my no-politics rule is when current events are extraordinarily important or affect me personally (see this earlier post). If I choose to be here in the arena of ideas, then I’d better be ready to stand my ground when it really counts.

If I hear the word “default” one more time, my head’s going to explode. Every time it’s mentioned, it’s coming from people who should damned well know better. Whether it’s politicians or news anchors — they should know that’s not going to happen. So they’re either ignorant, trying to scare us to further their own agendas, or haven’t the spine to stand up against the media narrative.

What we will see is a partial government shutdown. It’s not like we’re about to run out of money next week. You’re still paying taxes, right? So am I. That revenue is still flowing to DC.

The problem for them is there won’t be enough to cover all of our commitments. But you’d better believe there’s more than enough to cover our debt payments. And defense. And Social Security. And Medicare.

After those are paid for, there’s not much left. So a lot of (IMHO) non-essential functions will close up shop until this matter is settled: EPA, DOT, Education…the list goes on. Some of this is truly problematic, though: in my own experience it would be bad if FAA has no money to operate control towers and enroute centers. That would have serious economic ripple effects.

But what this will illustrate is the degree to which our government operates on borrowed money, and how much of our government wouldn’t be missed if we defund it. I’m convinced my kid’s schools would do just fine if the Education department went away tomorrow.

It’s not something we can fix overnight, but we’ve got to start now while we still have some choices. That’s why increasing the debt limit, which used to be frighteningly routine, has been turned into a budget fight. It had to be.

So how did we get here? Politics aside, it’s mostly math.

It starts with “baseline budgeting”, which DC foisted upon us in 1974. What that did was establish each year’s budget as the basis for next year’s, with a presumed rate of growth. Just like budgeting your home or business…


That’s why, when party R wants to limit spending increases from 4% to 2%, party D screams “draconian cuts!”, when all they’ve really proposed is cutting the rate of growth. So if your boss gave you a $.50/hour raise instead of a full $1/hour, you still got a raise. Just not as much as you’d hoped for. Whatever it is, it’s not a cut.

Got that? Good.

What’s horrific about this is that it set up government spending as compounding interest. My wild-@$$ guess is that it’s grown anywhere from 4 to 5% year-over-year since this started. There are spikes in there, and it’s really taken off in the last two years. But I’d say 4.5% is a good approximation.

So, starting with 1974’s budget (about $699 Billion), apply 4.5% interest over 37 years, and you get a little over $3 Trillion here in 2011.

Which, oddly enough, is almost exactly where we find ourselves today. Math is kind of neat like that.

Votes matter. Ideology and party affiliation matters. But until Congress does away with baseline budgeting, this problem cannot be fixed for the long term.

UPDATE: As if on cue, a DC staffer flat out admits that it serves their purposes when we’re scared. Just remember TARP. And that we’ve been here before.

Never let a good crisis go to waste, huh?