The Debt Limit Straw Man

The debt limit situation and headline is a disingenuous  straw man side show to what the credit rater Moodys is really warning about, credible deficit reduction. Politicians could take care of the debt limit at any time, the rest is problematic. It strikes me that 95% of the headlines are about the debt limit, which means that for circular thinkers with few brain cells, you can come up with a "deal" that does nothing, or puts it to the out years, extend the debt limit, and declare it all responsible. If you read what Moodys and other credit raters are actually saying, that's not enough, they have the US on a short leach.  A decline in the ratio debt to GDP would imply deficits of $300-400 billion tops (if GDP grew at 3%, also problematic) , not $1.1 trillion (FY 2012).

I think where Moodys will soon call foul is that the Hopium Administration is using  dishonest, pie in the sky budget projections for FY 2012, and 2013.   As debt to GDP approaches 100% this fall and these optimistic deficit projections completely fail to materialize, Moodys will have no choice but to downgrade the US credit.   Are they supposed to just ignore say a $1.3 trillion deficit in FY 2012?  The Government will have absolutely no room to go back to the well on more stimulus and tax cuts. These projections are built assuming no extensions of the payroll tax, unemployment extension or stimulus measures.  The other problem is that few too taxes are being collected.  The estimate for FY 2011 is 2.23 trillion, and two thirds through the year it has been 1.4 trillion, well short. Next year is projecting $2.533 trillion and Moodys will notice when this comes up way short. Here are the fictitious expected deficit hurdles.



In Moody own words;

3) If default is avoided, the Aaa rating would likely be affirmed after any review. Whether the outlook on the rating would be stable or negative would depend upon whether the outcome of the negotiations included meaningful progress toward substantial and credible long-term deficit reduction. Such reduction would imply stabilization within a few years and ultimately a decline in the government's debt ratios, including the ratio of debt to GDP.

Therefore parceiros, listen to how this drill plays out.  After a small crisis, Presidente Hopium gathers with the Congressional leadership on the White House lawn, announces agreement on a debt limit increase combined with a tax free profit repatriation for corporatists to bring capital back from abroad to hire more workers, blah, blah. Nothing that helps real gente will come from that, the deficits will balloon out more,  Tiffany stays busy, and the downgrades will come like a flock of swans.