US, UK Move Closer to Losing AAA Credit Rating

says Moody's Investors Service, and the stock market swooned just for the show I guess, and reversed back to end up in green (except for Nasdaq). "What's the big deal?" the market seems to be saying.

U.S., U.K. Move Closer to Losing Rating, Moody’s Says
(3/15/2010 Bloomberg)

"March 15 (Bloomberg) -- The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

"The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

"Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

"“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”

"The U.S. government will spend about 7 percent of its revenue servicing debt in 2010 and almost 11 percent in 2013, according to the baseline scenario of moderate economic recovery, fiscal adjustments in line with government plans and a gradual increase in interest rates, Moody’s said. [emphasis is mine]

"Under its adverse scenario, which assumes 0.5 percent lower growth each year, less fiscal adjustment and a stronger interest-rate shock, the U.S. will be paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said." [The article continues.]

The baseline debt service scenario is still assuming moderate economic recovery which may or may not happen, and fiscal adjustment in line with government plans (when is the last time things happened in line with government plans?). In other words, Moody's' baseline scenario is the best case scenario, and the more likely scenario may be the adverse one.

One thing is already happening right now: gradual increase in interest rates. Interest rates of Treasury bills, notes and bonds across the board have been creeping up. (For details, go to my other blog, treasuryauctionwatch.blogspot.com.)

We don't actually need the Federal Reserves' declaration that the fed funds rate will be raised (it's a guidance anyway, not that the Fed actually set the rate); the market is setting the Treasury rates higher, despite all the efforts by the concerned parties (the Federal Reserve, certain primary dealers - Goldman Sachs and J.P. Morgan Chase come to mind) to supress the rates and support the price (which amount to the same thing).

House Speaker Nancy Pelosi claims she has the votes to pass the health care "reform" that will burden the already over-burdened taxpayers. The administration claims the "reform" is budget-neutral, meaning it won't add to the deficit. It may be true, because all the cost is to be borne by the taxpayers out of their ever-shrinking pockets. If they dare pass the climate bill on top of the health care bill, there may be no recovery for the US economy, ever.

When the government butts in on the national economy like it has, it is a zero-sum game: the government takes away from the productive sector of the economy - private businesses and taxpayers - and distributes the loot among themselves under the pretence of giving it to the "poor", of creating "jobs".

"Each according to his ability, each according to his needs"? It may be a noble sentiment. But like the pilgrims found out the hard way, IT DOES NOT WORK. At all.

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Unintended Consequences Part II

(For Part I, click here.)

Every action has reaction, and that reaction is often not what the action was supposed to cause, not at least by the people who planned/executed the action. There are people, however, interested in the action and or its resultant reaction but having no say in its planning nor execution: a third party, you might say. These third party people often see the unintended, negative consequence before the action is to take place and warn the ancion implementers. They often get totally ignored, or worse, ridiculed. And when that unintended consequence actually happens instead of intended consequence, they are often still ignored, ridiculed, or worse, attacked as agents of bad outcome as if they are the ones who caused it. All the cool-headed third party could do is to say "I told you so".

Spanish experience shows so-called "green jobs" cause more job and money losses:

The March 2009 Study of the effects on employment of public aid to renewable energy sources says

• Every job created in renewable energy sector that the State (Spain) managed to finance, 2.2 jobs were lost from the non-subsidized sectors.
• Spain spent 571K Euro per each green job since 2000; 1 million Euro per wind power job.
• Only 1 in 10 green jobs resulted in permanent position.
• Spanish citizens should expect to pay higher utility rate (31% higher) or pay higher taxes in order to cover the cost of subsidizing the inefficient renewable energy generation.
• Spain runs the risk of being straddled with obsolete, inefficient legacy assets (particularly in wind and photovoltaic).
• The executive summary is titled "Lessons from the Spanish renewables bubble". It's a green bubble.
• Spanish experience is what President Obama cited as model.

Government and cutting-edge technology usually don't go together. But I was encouraged to see the word "bubble". Here we go! We need a new bubble so that we can re-inflate the economy, right?

To be fair, Germany says green job will shorten recession. I lived in Germany for a brief period (6 months or so). I rented an apartment. What I still remember is several huge dumpsters in the apartment courtyard, where the residents were supposed to sort out 5 or 6 different types of garbage. Most residents didn't have that kind of time - they were busy making a living. So what seemed to have happened was they brought down the garbage, in paper or plastic bags and just left the bags outside the bins. Every week I saw piles of these bags in the courtyard, outside the dumpsters. The only thing that was sorted out was newspaper. I'm sure they had a surge of employment at garbage sorting facilities.

Britain's wind farms stopped working during this January's cold spell, though it was blamed on UFO. Seriously.

Proposed crackdown on offshore tax havens and the so-called "tax cheaters" upset the British bankers.

And they are threatening to throw out the US clients because it will be too expensive to service US clients if the new international tax proposal by the Obama administration (it's in the budget proposal) gets enacted.

If I remember right, the Brits, from the prime minister on down, were openly and enthusiastically supporting the candidate Obama. They now have to be prepared to take the whole package, I'm afraid, and that may include a US invasion of the UK territory (Cayman Islands), as expressed by a US journalist (see my post, 2nd half).

Standard and Poor threatened the UK with downgrade.

And they ended up scaring the US financial markets and threatening the US dollar. The stock market lost interest in going up, the yields on longer-dated Treasuries skyrocketed, and the US dollar index sank to a multi-month low, to a 20-year support level.

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