Floyd Reports


Obama’s Downgrade May Last Until 2029


Obama scored another historical first on Friday, becoming the first president to see the U.S. credit rating downgraded by Standard & Poor’s, from AAA to AA+. While we hope his presidential reign lasts no longer than January 2013, Americans may have to live with the consequences of Obamanomics for more than a decade to come. The chairman of Standard & Poor’s sovereign debt ratings, John Chambers, told ABC’s This Week program on Sunday the United States could be stuck with the lower credit rating between nine and 18 years. “We’ve had five governments that lost their AAA that got it back,” he said. “The amount of time that it took for those five range from 9 years to 18 years.” He forecast that digging America out of the debt ditch “could take awhile,” and that it would require two things: “a stabilization of the debt as a share of the economy and eventual decline” and “more ability to reach consensus in Washington than what we’re observing now.”

The president’s commitment to deficit spending and unwillingness to make enforceable budget cuts leave a grim prognosis. But the outlook gets worse. As this author noted Friday, there is a chance America will be downgraded yet again. Chambers placed the odds of a future downgrade at one-in-three. Scoring a AA rating would place the Land of the Free on equal terms with Spain and Qatar.

These realities had Obama in full Alinsky mode during his 1 p.m. speech (which took place at two o’clock this afternoon). He opened by saying, while Tea Party intransigence forced S&P to cut our debt rating, “The markets, on the other hand, continue to believe our credit status is AAA.” To bolster his case, he added, “Warren Buffett, who knows a thing or two about good investments, said, ‘If there were a quadruple-A rating, I’d give the United States that.'” Even as he spoke, the stock market was in free fall. The Dow Jones industrial average fell 634.76 points this afternoon. The slide capped off a string of losses so severe that CNBC reports, on this eighth day of the month, “August is already on track to be the worst month for the S&P [500] and Nasdaq since Oct. 2008,” the first full month of the economic meltdown. And despite earning the Obama administration’s seal of approval, Standard & Poor’s marked down Buffett’s Birkshire Hathaway holding conglomerate from “stable” to “negative” today.

Obama’s Surrogates Savage the Savers

Democratic talking heads did their best to pin blame on their political opponents. This weekend, both David Axelrod and Sen. John Kerry repeated the phrase “Tea Party downgrade.”

Treasury Secretary Tim Geithner eschewed presidential responsibility, as well. “Congress ultimately owns the credit rating of the United States,” he said. This would be true in the sense that Obama offered absolutely no leadership during the debate and presented no plan of his own but would overlook the president’s addiction to deficit spending and hostility to fiscal (or political) responsibility. Geithner, suddenly discovering the Founding Fathers, noted Congress has “the power of the purse in the Constitution.” That fact did not keep Geithner from publicly musing about having Obama unilaterally raise the debt ceiling in late June, leading to a chorus of Democrats demanding the president invoke the 14th Amendment to claim the power of the purse as his own.

Not everyone is reading from the same script, though. As usual, Bill and Hillary Clinton have taken the crisis to spin things in their favor. The Hill newspaper reports former Clinton administration appointees, who insisted on remaining anonymous, said Obama bungled communications during the debt ceiling debate. One of them crowed former president Bill “Clinton had a different approach on strategic messaging,” and if Obama had copied his approach it would have “worked better.” Such leaks undermine Obama, vindicate Bill Clinton, and give Hillary an undeserved reputation as a moderate if she wishes to launch a primary challenge against Obama in 2012 or a run in her own right four years later.

Chinese Blotter Torture

Obama’s intraparty nemeses are not the only ones taunting the president. As if to illustrate the Biblical maxim that “the borrower is servant to the lender,” the Chinese-controlled Xinhua news agency ran a scathing commentary on Saturday that stated, “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.” The downgrade, the agency lectured, gave China the right to set U.S. economic policy, or for the United States to give part of its economic sovereignty over to an unnamed international organization. “China, the largest creditor of the world’s sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets,” it stated. “International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country.”

The editorial did not specify precisely what kind of “international supervision” Beijing has in mind. But the Communist government, which has long clamored to replace the U.S. dollar as the world’s reserve currency, used the Obama downgrade to renew the call. Guan Jianzhong, chairman of China’s Dagong Global Credit Rating (and who, like all Chinese businessmen, speaks at the prompting of the government) said the lowered credit rating has set into motion an “irreversible” trend that will lead to the U.S. dollar being “gradually discarded by the world” as its reserve currency.

This author wrote about the possibility, and its consequences, a year ago. Economists agree both that the United States is flirting with losing its status as the world’s currency of choice and that, if such a change comes about, it will set the American economy further back on its heels.

Dr. Barry Eichengreen summarized the likely impact of losing the reserve status in the Wall Street Journal in March:

My calculations suggest that the dollar will have to fall by roughly 20%. Because the prices of imported goods will rise in the U.S., living standards will be reduced by about 1.5% of GDP—$225 billion in today’s dollars. That is the equivalent to a half-year of normal economic growth.

The financial consequences would go far beyond the retirees who see their life savings reduced by one-fifth overnight. The change in the international currency markets will make doing business overseas more difficult for U.S. firms, slowing the pace of growth. It would also make it costlier to finance more borrowing for the national debt.

Meanwhile, the national debt could easily top 100 percent of GDP by 2021, with half of all tax revenues going to service the interest on the national debt alone.

The Obama downgrade hastens the day when China eclipses the United States as the world’s superpower. That would be yet another historic Obama first.


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