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Tuesday, July 26, 2011

Obama Has The GOP Set Up To Take Fall For Credit Rating Downgrade

Whether we end up with Harry Reid's  $2.7 trillion cut plan which really only cuts $1.7 trillion or Speaker Boehner's $1 trillion dollar cut which actually cuts only $850 billion or some other scheme which we don't know about, one thing is very clear, the United States is about to lose its AAA Credit Rating. In fact even a real cut of $4 trillion would do very little to stem the inevitable. And it may even happen before August 2nd.  I would suspect that the coming downgrade had more to do with last night's Presidential speech than any feud with the tea party or the GOP.
The White House had been alerted repeatedly over the past month by rating agencies that without a strong, long-term plan to restructure the country’s debt, they would lower America’s credit rating as soon as this Friday, according to two officials familiar with the process. The White House was warned that the deal would have to be significant—and not a short-term fix over the next few days to avoid a credit drop.

Analysts with Moody’s and Standard & Poor’s, the nation’s top two rating agencies, declined to be quoted on the record, indicating that even benign statements about timing and ratings decisions can rattle markets and startle investors. But earlier this month, both agencies placed the U.S. government on notice of a downgrade of at least one notch, if not more, to a AA rating. In a written statement, S&P analysts said they believed "there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling."
Ya think?  It has become painfully obvious that President Obama has decided that his stand on the budget will be the cornerstone of his reelection strategy. This fight is tailor made for Barack Obama. He can make false charges about the GOP picking big corporation over grandma.  Any cuts could be matched with rhetoric about sharing the burden.  And the President can look like Obama the peacemaker just trying to keep the stiff-necked Republican party in line, as no one calls him on his partisanship.  As an added bonus he gets to slam those pesky tea partiers who cost him the house in 2010 (despite the fact that if it wasn't for the tea party no one would be considering major budget cuts).

Obama is taking his stand so he can look good when the US's credit rating gets down graded no matter what he does. 


Reuters contacted 53 economists and 30 of them predicted that the US would be down graded by at least one of the three major ratings services Standard & Poor's, Moody's or Fitch.

The most likely to downgrade would be Standard and Poor's who has said there was a 50-50 chance of a downgrade, if Congress and President Obama failed to find a "credible solution to the rising U.S. government debt burden." S&P said it may cut the U.S. rating to AA within 90 days. Passing a $4 trillion agreement could prevent a downgrade, S&P said.

A $4 trillion debt-reduction plan sounds a lot like the agreement that was being negotiated by Obama and House Speaker John Boehner last week, at least until Obama insisted on raising the revenue part of the deal by $400 billion. 

Moody's Investors Service, said the U.S. government would likely keep its top rating if it avoids a default."

Most of the Reuters-polled economists believe the chance of a default is next to nothing but the exploding federal debt and the debate about cutting the debt has already done damage to the economy.

If the downgrade happens, things will get more expensive. Mortgage rates could rise. States and cities, already in trouble, could find it more difficult to borrow. Stock prices may tumble.

And there's more.  The same Reuters poll predicted that there's a 20% chance of another recession.

Now put this all together, US Government credit rating is likely to get downgraded whether we make the cuts or not, and the economy which has been slowing down since April may fall into recession, now Obama's speech yesterday makes sense.

Yesterday President Obama was trying to attack a deal that was already made. He kept talking about the "balanced approach" even though Harry Reid already presented a plan with no tax increases, and Obama endorsed it! He talked about the debt limit the credit rating and GOP intransigence. Obama talked about how the GOP would push the country into default and hurt our credit rating, even though he knows that there is very little chance the US will default and very little chance we will avoid a downgrade.


What seemed weird yesterday seems like a set up today.  Assuming that the US is downgraded, and the economy falls into the recession it has been flirting with since April, Barack Obama will state the case that we went into recession because of the downgrade which was caused by the Tea Party Republicans.


The possibility of this scenario makes it even more important for the GOP to hold its ground.  You can't avoid the inevitable, but you can force major spending cuts, prevent job killing tax-increases, and in the end save our economy in the long run.

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