Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

U.S. Credit Rating, Automation can’t Curb DC’s Spending

Personal_Finance / Government Spending Nov 30, 2011 - 03:22 AM GMT

By: Dr_Jeff_Lewis


As Washington DC frets the automatic cuts coming from a failure of the super-committee, the American public is watching their wealth vanish.  This disappearing act of wealth occurs on two fronts, first by the continuous spending and inflating in Washington, and secondly by a loss of confidence, which has sent the stock market plummeting in recent days.

It appears certain that the automatic cuts that were supposed to come into play after a failure in action by the super-committee might not be so automatic.  Senator John McCain is leading a Republican charge to save cuts from the military.  Democratic leaders are rallying their Congressional members to save cuts to social programs.

Nothing was lost

In truth, the headline figures made public as part of a $1.2 trillion deficit reduction were hardly true cuts.  Congress calculates future cuts to the CBO baseline, a model of future spending.  To cut only $1.2 trillion from 10 years of the CBO baseline is to tell the American people that Congress will spend more; it just won’t increase spending as much.  Military expenditures, for example, would still grow by $100 billion over ten years, even as Congress calls such changes “cuts” to the budget.

The real focus for investors shouldn’t be the suggested cuts to the budget.  With or without an additional $1.2 trillion in spending, the US deficit will continue to grow with virtually zero upper bound.  The real concern, for investors, taxpayers, and citizens of the United States, is that any action to thwart cuts to government spending could result in another round of downgrades on US debt issues.

S&P’s Early Move

Standard & Poors was belittled, even investigated, for downgrading the United States from triple-A to double-A status.  The ratings agency uses a forward model which judges the statistical potential for default, not the current financial standing of a business or nation itself.  In downgrading the United States, S&P told the markets that the United States has a higher potential for default, mostly due to political infighting in Washington DC.

Now that Washington has indicated it will not tolerate any amount of cuts to the budget, not even cuts to future spending growth, other ratings agencies could follow the S&P to downgrade American debt issues.  This weekend, a Moody’s economist noted that a downgrade from their firm is unlikely, saying ““You know, it’s all relative to expectations and investor expectations with regard to the committee I think are — have been and are still very, very low.” 

However, the agencies remain on the watch.   Ratings agencies warned that a failure today would not result in an immediate downgrade, as Congress has until the 2013 budget decision to enact spending cuts.  If Congress fails to act, then the next step, one year from today, would be new cuts to the United States’ standing in the credit markets.

Investors who are forward thinkers know that such a downgrade would rattle the markets.  For Wall Street, one downgrade was a source of entertainment; two downgrades would be confirmation of the new reality.  A second downgrade of American debt could send yields higher, government expenditures upward and deficits larger.  Investors should remind themselves that Greece and Italy were broke to begin with, but it was rocketing government debt yields that finally broke the camel’s back.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules