Fed Credit Rating Downgraded


Today, Aug. 5, 2011, is a date that will live in infamy.

It is the day that Standard & Poor’s – one of the three agencies which┬árate credit – removed the United States government from its list of risk-free borrowers for the first time.

In so doing it officially questioned the stability of the dollar, the world’s standard currency, and by extension the entire global economic system that has evolved around it.

To paraphrase Winston Churchill at the end of the Battle of Britain: “now, this is not the end, it is not even the beginning of the end, but it is perhaps the end of the beginning.”

The end of the era in which Americans routinely assumed we were world leaders with a birthright to serve as the planet’s policeman and banker; that the people we elected to public office represented our best interests; that we live in a free nation that is the envy of other peoples; and that we are all equal citizens of a representative democracy, rather than a corporate oligarchy ruled by multinational corporations and powerful political families.

“We are on the brink of a yet another financial crisis,” said Diane Swonk, chief economist of Mesirow Financial. “The most likely scenario is that growth remains weak and we continue to muddle along in the no man’s land we now call a recovery in the U.S. One cannot dismiss, however, the risk of a double dip, especially in light of the train wreck we are forced to watch again and again in our political system.”

The New York Times claims the downgrade has few clear financial implications.

KabukiNot true.

The move has almost no positive financial implications for anyone except perhaps those invested in gold, which has surged 12 percent, or $177.50, to $1,664.10 an ounce since July 1 as the two political machines have jockeyed for power in their kabuki theater performance of the federal debt ceiling. Both major parties have shown that they are willing to risk damaging the greater good to better position themselves for the 2012 presidential election.

The GOP illustrated their predatory nature by creating this disgraceful situation in the first place. But President Barack Obama participated in the political brinksmanship, too, by opting not to raise the debt ceiling himself under the 14th Amendment.

Gold, the currency of a post-apocalyptic world, is likely to rise further Monday in the first full day of trading after the downgrade, which was announced after the close of trading Friday. The steepness of that rise will provide us all with key insight into just how alarmed investors have become about the two political machines in Washington, D.C.

And lets not fool ourselves, when we say “investors” we’re really talking about nations with huge dollar holdings like China and Saudia Arabia, and their citizens. The painful truth is that a global financial system built on the wealth of future generations suddenly finds itself gasping for air.

The government of China, the largest foreign holder of U.S. debt with $1.1 trillion, responded to the downgrade by calling on our political class to cure their “addiction” to debt and live within their means.

goldMonday’s gold prices will tell us whether we’re looking at simply the second scoop of a double-dip recession or a depression.

My suspicion is that we’re headed for a depression. I base that conclusion solely on the knowledge of the two seemingly infinite loops that have created downward spirals the past decade inside the DC Beltway and on Wall Street. And the knowledge that Friday’s payroll report was actually far more negative than most people realize.

The first loop is the bastardization of the fiduciary obligation of CEOs to maximize shareholder value at publicly traded companies, which has replaced sustainable long-term profit goals with short-term goals as investors have shortened the period they’re willing to hold onto stocks. Some of those short-term gains actually have adverse long-term impacts for the companies that pursue them, like airline bag fees and the excessive late fees Blockbuster once assessed.

These companies wind up consuming their own futures, instead of evolving into stable and lasting business institutions. For some reason this behavior is supposed to be OK, because the CEOs get rich on their stock options and leave the problems they create for the successors, just as President Geroge W. Bush did to Obama.

The second loop is the adoption of that same short-term “greed is good” philosophy by the bean counters that run the Republican and Democratic parties, who have decided that politicians are now a commodity if they have enough marketing money to sell them to the general public. Their focus now is on growing donations in the short-term by any means necessary, as Karl Rove tried to do in 2006 by scapegoating Hispanic immigrants to energize the Republican base. Nevermind that doing so alienated the fastest growing American ethnic group and cut the legs out from under GOP leaders like Jeb Bush, who were hugely popular with them.

titanicThese two loops are the icebergs scraping along the side of the unsinkable Titanic ship of state. All that’s left is to watch the inevitable tragedy play out now that the neutered U.S. press has been reduced to the status of the eight-member band playing “A Night to Remember” on the deck of the sinking Titanic.

The one song it is not playing is the painful truth that the U.S. government has placed itself at the head of a global family it’s no longer fit to lead. Our dysfunctional political system, which has adopted the short-term profit growth strategy of the multinationals, is no longer capable of planning for the future. It has  devolved instead into a perpetual election mode, in which the good of the many is constantly put off for tomorrow.

spThe real question posed by the S&P downgrade is how an American government that is incapable of acting in the best interests of its own people can possibly be trusted to act in the best interests of all mankind?

The painful truth is that it can’t.

We all know what’s going on. Instead of electing the best of us, we’re now electing those who stand for nothing but their own short-term greed – commodity politicians the political strategists can shape like clay. Instead of electing people who lead by example, we’re electing the kind of people who would consume every kernel of corn if they were farmers rather than save some for the next year’s plantings.

“Yesterday’s ratings downgrade is the result of a completely self-inflicted wound,” according to the moderate Thinktank Third Way. “Washington was warned that it had to avoid both default and a downgrade, and instead played a high stakes game of chicken with the full faith and credit of the U.S. [The] downgrade decision is not a statement on the American economy, but an indictment of a dysfunctional political system and the willingness to use national default as a negotiating tactic to push for extreme ideological demands.”

We have reached the apex of the swing in game theory where cheaters rule – and by their very predominance undermine the riches they once amassed through dishonesty and duplicity; the point at which no one trusts eachother any more because cheating has become so widespread; and the point where cheating is no longer a winning strategy. Unfortunately, and perhaps fatally, the cheating elites at the top of our Society have become so habituated to their own lies that they’re now incapable of behaving otherwise.

Former Fed Chairman Alan Greenspan, the lion of deregulation, helped embark our nation on this path years ago when he argued that markets could police themselves more effectively if they were deregulated, than if federal regulators enforced minimum standards of conduct. The idea being that once enough people were victimized by a cheat, like an Enron, Madoff or Countrywide Financial, everyone would know to avoid that scoundrel.

If Greenspan had been a student of game theory he might have understood that the other logical outcome from this strategy is a mountain of victims and a world without trust, honor and integrity. We’re seeing that scenario right now in the U.S. housing industry, which has become so infected with exaggertaions and sins of omission that it is incapable of rebuilding its broken bond of trust with consumers.

bulll 2The housing market delayed its Come-to-Jesus moment in 2009 by raiding the Treasury for a variety of subsidies for home buyers. As a result, the necessary correction in home prices that would have occurred in a free market was delayed and may now take a decade to play out.

The same race to the bottom is also happening in the medical and legal professions. These industries are no longer led by doctors and lawyers, but by their own versions of professional bean counters obsessed with short-term profit growth.

bullWe’re seeing the same scenario in politics, too, where the two political machines have become so accustomed to the big lie that their members are incapable of working together toward the big truth, which is that we’re all in this world together. The super wealthy and powerful are not a breed apart and cannot insulate themselves from the harmful effects of the global collapse their short-term greed is facilitating.

Instead of responding to popular disgust with the two political machines by rebuilding the political industry’s bond of trust with voters, the K-Street lobbyists cooked up the Tea Party movement and launched Fox News to hijack that energy for change and delay their Come-to-Jesus moment.

The painful truth they’re trying to ignore is that voters have tried to foster change by ousting incumbents from both parties in two straight federal elections now. In each case, the party that did best has misrepresented the results as a mandate for their policies – the Dems in 2008 and the GOP in 2010 – rather than accept the idea they’re both dead to voters.

YoungWe’re still routinely treated to the spectacle of entrenched leaders like U.S. Rep. Charles Rangel, (D-NY)  and  U.S. Rep. CW Bill Young (R-Fla.),  who have been in the U.S. House of Representatives for an incredible and disgraceful 40 and 38 years respectively. If that’s not a systemic cheat on an American people that think they’re protected from such shenanigans by term limits, what is?

The real question now is what shape the collapse of our political system will take. We can’t stop buying politics as we have stopped buying homes, because the political industry no longer depends on donations from everyday people for its annual revenue.

Voters are clearly primed for other options than those offered by the two primary political parties. However, the parties have created financial obstacles that favor wealthy and powerful candidates and prevent average people like you and me from securing office without allying ourselves with a political machine.

There’s an old saying that the beauty of the American system of government is that we have a bloodless revolution every four years at the ballot box. Well, voters searching for the levers of change and having a very hard time finding them.

The problem is the absence of representative major-party candidates. We’re being given the choice of voting for the crook who works for the special interests that own the Democratic Party or the crook who works for the special interests that own the Republican Party.

It’s hard to believe that the members our professional political class are really foolish enough to believe they can delay this Come-to-Jesus moment with this kind of shell game.

S&P says they are.