Zeev's Turnips Patch-No Politics (ZEEV)

[marketmaven]

Cash, short sell restrictions as "pre-emptive" - makes it harder to hedge WHEN this comes...S&P Downgrades US Debt

WASHINGTON D.C.—A credit-ratings firm issued a warning to the United States government about the country's borrowing, threatening to downgrade the nation's sovereign debt unless policy makers find a way to pull the economy out of its deflationary spiral while curbing public spending.

The statement from Standard & Poor's on Tuesday was the first formal declaration of concern from a ratings company about U.S. borrowing in the months since investors began to raise questions about the sustainability of government debt, estimated to have reached the size of the country's entire economic output for the year ending in March—the highest level in the industrialized world.

Yes, I just switched the word "Japan" for "U.S."
http://www.zerohedge.com/article/sp-threatens-downgrade-us-credit-rating-er-japan-excuse-me

There is no question that the U.S. is headed in this direction. Presently our GDP is about $13 to $14 trillion, and national debt is about $12.3 trillion. The news today is that the budget deficit is (shock!) higher than expected: $1.417 trillion. President Obama will announce in his State of the Union address that they will put a three year freeze on discretionary spending. The freeze will impact only 17% of the budget or $447 billion this year out of a $3.5 trillion federal budget. Defense, social security and Medicare will remain untouched. They expect to save $250 billion over 10 years. Ho hum. I understand you've got to start somewhere, but this is a small fraction of the real problem.

At the same time:

Obama and Vice President Joe Biden yesterday announced proposals for a package of tax cuts aimed at middle-income Americans that include an increased tax credit for child care and an expansion of tax credits to match retirement savings.

The White House also is backing a $154 billion jobs bill that passed the House last month. In addition, the president said Jan. 19 that he will add $1.35 billion to his budget for an education program to improve students’ test scores.

But ... This is one of those comic John Stewart moments when he gets flustered over obvious inconsistencies. But don't worry Obama will appoint a commission to resolve all of this.

By some estimates the national debt will double by 2019 and could balloon up to about $24 trillion. We'll get the dead fish from S&P long before that occurs.

Since we are pursuing the same Keynesian stimulus policies as is Japan, we will run into the same problem: a stagnating economy. Which means OMB predictions of tax revenues will be lower than budgeted.

The one thing that Japan has is savings. Their national debt is financed almost entirely by internal savings: "[S&P] noted Japan's status as the world's biggest net creditor, massive foreign reserves and the yen as a reserve currency."

While U.S. savings are growing, more than 30% of our debt is financed abroad. Which means China, Japan, U.K., Canada and other debt holders are concerned.

This means that the Administration is worried, especially after all of its promises to China. Since they can't cut spending significantly, there will be consequences:

1. Further decline of the dollar.
2. Higher debt costs because of sovereign credit downgrades.
3. Increased taxation, specifically a form of sales tax or VAT.
4. Slower growth as government sucks more capital out of the economy.
5. Inflation, as the government needs to pay off debt with cheap dollars.

I am not looking forward to the day when politicians realize there are economic consequences from their political decisions. The irony will be too great and we all will suffer from their ignorance.