A day after a congressional budget deal that ramps up federal spending and eliminates the ceiling on public debt, China’s premiere rating agency has downgraded the U.S. government’s credit rating.
In marking down Washington’s credit-worthiness, Dagong Global Credit Rating specified that the move was not a response to the 16-day partial government shutdown but to the federal government’s mounting debt and rampant spending. Dagong said the theatrical battle over the partial shutdown merely “highlights the deterioration of the government’s solvency,” revealing a cycle wherein “the debt crisis evolves into a political crisis, which in turn exacerbates the debt crisis.”
It is far from clear how much, or even if, the shutdown made America’s debt situation worse, but Keynesian macro-economists have been busily making far-fetched claims about how the U.S. economy was hurt by a stalemate that temporarily stopped a mere 17 percent of public spending.
For example, Macroeconomic Advisors has published a report claiming that the contraction in deficit spending has cost the economy $12 billion. Standard & Poor’s, meanwhile, estimates that the shutdown cost $24 billion.
How to reconcile such disparate estimates? The Atlantic senior editor Derek Thompson finds a highly scientific way:
“Macroeconomic Advisers put the figure at $12 billion,” Thompson writes. “S&P estimate the cost was twice as high, at $24 billion. Split the difference, and you’re talking about $18 billion in lost work.”
The head of The Atlantic’s “Business Channel” goes on to guesstimate that the entire cost of the debt debate since 2010 is three percent of the entire U.S. economy.
“Counter-factual accounting is guess-work by definition,” business expert Thompson allows.
Budgeting, on the other hand, is by necessity precise. Dagong’s downgrade announcement, which eschews macro-economic pseudoscience for more practical measurements, notes that since President Obama took office, the ratio of the federal government’s stock of debts to fiscal income has grown from 4.0 to 6.6, and that while debt stock increased by 60.7 percent during the same period, nominal GDP increased by only 8.5 percent. Meanwhile, fiscal income — despite the Obama tax hikes and a widely discussed economic “recovery” that should have raised tax revenues — decreased by 2.9 percent.
“The debt ceiling has been extended continually, increasing the total amount of the federal government debts,” Dagong writes. “In order to avoid the sovereign debt default, it becomes an inevitable choice for the U.S. government to repay its old debts through raising new debts. The fact that the debts grow faster than the fiscal incomes will further impair the federal government’s solvency. Ever since Obama’s inauguration in 2009, the U.S. Congress has extended the debt ceiling for five times, reaching a total volume of USD5.1tn. This further raise of the debt ceiling shows the government’s incapability of improving its solvency by improving the basic economic and fiscal elements.”
Keynesian witch doctors have also been busily reassuring Americans that the Federal Reserve’s unlimited money creation has no downside because — even though you are clearly paying something like a dollar more for a 59-ounce container of orange juice than you did for a 64-ounce container just two years ago — inflation is either too low or non-existent. But Dagong’s report gives little support to this tall tale.
“In order to avoid the debt default caused by the lack of debt repayment sources such as fiscal incomes,” Dagong writes, “the U.S. government has been taking advantage of the international currency dominance of the U.S. dollar to monetize its debts and has been taking quantitative easing monetary policy to maintain its government solvency since 2008. The devaluation of the stock of debts hereby directly damages the creditors’ interests. Dagong estimates that the depreciation of the U.S. dollar caused a loss of USD628.5bn on foreign creditors over the years of 2008 to 2012.”
There is one piece of good news for proponents of unlimited government debt. Dagong is not recognized by the Securities Exchange Commission, and does not get as much respect as the U.S. rating agencies. The “big three” U.S. agencies operate with government approval, though they claim to be free from political manipulation. (Related: ‘Why now?’ Fitch’s downgrade threat raises questions)
The United States government has defaulted on its debt service at least twice. (Related: Government default? It’s already happened, twice)