Why the U.S. Volunteered for the Downgrade and How to Change The Idiocy

August 14th, 2011
in Announcements

self-flagellation by Guest Author Andrew Butter

It seems as if America actually volunteered for the downgrade.  It was almost like a self-flagellation exercise.  To use an analogy from the housing market mess, did we see a threat of a strategic default?  (Strategic default occurs when a mortgagor, who has the means to make mortgage payments, choses not too because of negative equity in the property mortgaged.)

In my investment article this week I pointed out some curious market behavior that resulted:

Follow up:

What’s really confusing is that 10-Year yields tanked after the downgrade.  The way it’s supposed to work is that when you get a downgrade, the yield on your piece of the toxic asset pool, is supposed to go up.

What’s also interesting is that the S&P 500 started to tank the day after Lehman folded, but it took another two months for yields on the 10-Year to start to tank. This time around, they both tanked in tandem.

Perhaps the difference was that back then there was the legacy of George Bush who, for all his failings, did manage to unite the nation behind him.

Let me expand on that point.  For example, when he said “Hey guys, last night I had a talk with the person to whom I have a special telephone line, and he says it would be a good idea to borrow $1 trillion and blow that looking for WMD in Iraq”; the American people and Congress rallied round, and God’s Workers set about helping to facilitate the money.

No pun intended on the “blow” word, although it might be worth noting that according to some analysts that piece of Rambo Diplomacy may actually have cost $4.7 trillion by the time it’s over, but I’m sure every American feels safer when they tuck themselves up in bed at night, so I guess that was money well spent?

When George’s minions suggested TARP, he got a green-light to sign the check and when Ben started talking about TALF which started off as a $200 billion loan facility, and grew into a $1.6 trillion repository for second-hand shoes, no one batted an eyebrow.

Then Obama stood up and said, “come on guys, we got to roll over the debts that George and his policies (and God’s Workers) ran up, or we will get a downgrade.”

Congress and the nation said “we would prefer to have the downgrade”.

That’s democracy in action just like it works in other places where you also don’t have the option of ticking “None of the above” on the voting slip, like in Syria.

What next?

Well nothing much really.  The exhibition of crass incompetence was the trigger for the inevitable to happen.  It just as well could have been something else.

But nothing has really changed, the unhappy ship of America will stagger onwards, and Americans with money will continue to spend it and continue to resist the efforts of the government to put its hand in their pocket so that the crumbling infrastructure and optimism of a once-great country can be re-built.

There is a lot of money in America, and there is even more, owned by (a small minority) of Americans, kept outside America.  Outsourcing was nothing to do with labor costs; if it was, then why didn’t that happen in Germany or Japan? Outsourcing was about tax avoidance, period.  Now 50% of the profits of S&P 500 corporations are made outside America where it’s much easier to avoid paying tax, and so what if the US economy tanks?  The value of the S&P 500 is about what happens to the money that rich people control.  What happens to the 20% of Americans who have zero or less is irrelevant to that algorithm.

Solving Some Problems

It wouldn’t be hard to get America back on track and Americans back in work, for example, here are three easy wins:

1:  Charge a wealth tax of 3% a year on what Americans and foreigners with a right of abode in USA own.  That would bring in $1.5 trillion a year.  Is that unfair?  Not at all.  If you can’t make more than 3% on your assets a year, you don’t deserve them.  And, in any case, setting the base rate less than inflation is doing that now, just poor people and people on fixed incomes are the ones that suffer.

Meanwhile the rich can make hay, borrowing from the Fed at 0% and lending    to the Treasury at 3% (which is where the 10-Year is headed).

And if the rich don’t like that they can forsake the protection that they get by      living in America, and go and re-locate to places where you need to pay much     more in “protection” money - like Mogadishu or Damascus.  Getting rich people in a community to pay money out to support the less fortunate is one of God’s Laws.  Christians call it tithing; the Muslims call it Zakat.  And, by-the way, that’s not supposed to be spent on Rambo to defend the rich against evil.    That’s extra.

2:  Put a $4 a gallon tax on gasoline to bring prices in line with prices everywhere else in the developed world.  That would bring in $500 billion a year, and probably halve America’s current account deficit, which has to be financed by borrowing from aliens.

3: Cut military spending by half.  I know Americans love to play Rambo and GI  Jane so that rich people can go to sleep at night and dream of making more money, but $1 trillion a year for a country that just got downgraded, is a               ridiculous luxury.

There you have it, $2.5 trillion a year; and if you wanted to get Americans back to work, just forget about corporate taxation altogether.  It’s not as if it generates much money, particularly since corporations can avoid paying it by outsourcing, and the increased investment and employment would easily generate more tax than was lost.

And if you really want to get the show on the road, scale back income tax.

Will that happen?

Not likely, American politicians will do what they know best.  They will dither and look for lobbyists to give them kickbacks.  It’s no different in Syria, so more than likely nominal GDP growth will hover around 3% a year (how much of that is “real” is irrelevant insofar as the stocks are concerned), and so the 10-Year will hover around 3% too.

America, including the rich, has succumbed to the free lunch syndrome.  Strategic default is just another manifestation.

Related Articles

A Bum Debt Deal – The Morss Antidote by Elliott Morss

Casting Sunlight on the National Debt Fraud by Roger Erickson

About the Author

Andrew Butter started off in construction in UAE and Saudi Arabia; after the invasion of Kuwait opened Dryland Consultants in partnership with an economist doing primary and secondary research and building econometric models, clients included Bechtel, Unilever, BP, Honda, Emirates Airlines, and Dubai Government.
Split up with partner in 1995 and re-started the firm as ABMC mainly doing strategy, business plans, and valuations of businesses and commercial real estate, initially as a subcontractor for Cushman & Wakefield and later for Moore Stephens. Set up a capability to manage real estate development in Dubai and Abu Dhabi in 2000, typically advised / directed from bare-land to tendering the main construction contract.
Put the unit on ice in 2007 in anticipation of the popping of the Dubai bubble,defensive investment strategies relating to the credit crunch; spent most of 2008 trying to figure out how bubbles work, writing a book called BubbleOmics. Andrew has an MA Cambridge University (Natural Science), and Diploma (Fine Art) Leeds Art College.

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