A downgrading of trust
By David Post
Is $1 trillion a bad number or a good number? S&P thought it was a good number, but Congress thought it was a bad number. Then, S&P decided that $2 trillion was a bad number.
$4 trillion was the real problem.
Government math is always fun.
Over the next 10 years, U.S. budget deficits are projected to be approximately $10 trillion. For the past year, the consensus has been that the United States should find a way to reduce that amount by at least $4 trillion.
Why $4 trillion? Apparently, that’s what world financial markets expected. Markets are like lemmings marching into the sea. The easy thing for financial analysts to do is to agree with each other and proudly report their “consensus” estimates.
The consensus was that $4 trillion was the desired amount that estimated deficits should be reduced — that is, from $10 trillion to $6 trillion. Consensus also anticipated that reductions of that magnitude would require both spending controls and new revenues (formerly known as “taxes”).
The so-called Gang of Six, a bipartisan group of senators, tried to put together a plan to achieve $4 trillion in savings over the next 10 years.
The Simpson-Bowles commission submitted a $4 trillion deficit reduction plan.
Citizens for a Responsible Federal Budget, the bipartisan organization that tried to warn the country of the budget deficit problem 20 years ago, recommends $4 trillion in deficit reduction.
The Conference Board made up of corporate CEOs and business leaders set $4 trillion as the goal.
Give or take a few hundred billion here or there (no joke), all those plans anticipated spending reductions of $2-3 trillion plus additional revenues of $1-2 trillion. Whatever the mix, $4 trillion was the consensus number.
When Congress finally agreed on $2 trillion in spending cuts, some already scheduled and most to be determined later, the markets said, “Are you serious?”
Markets don’t care about the reasons. Republicans have their “no tax increase” pledge. Democrats don’t want to touch Social Security and Medicare. What markets care about are the numbers. And the ability to fix what’s broken.
Markets do care about broken promises and unmet expectations, and markets don’t permit either without exacting some punishment.
Meanwhile, the S&P, along with other credit rating agencies, sits on a mountain top and shares its opinion about how well borrowers repay their loans. Borrowers and lenders and markets may disagree, but they pay attention to credit rating agency opinions.
During the debt ceiling fight, like a stern parent, S&P warned Congress, “If you ignore consensus, there will be consequences.”
We didn’t and there were. S&P gave us a good spanking — in public. “You missed consensus,” S&P said, “but more importantly, we can’t trust you to work together to fix this problem.”
The markets agreed and said, “That’s gonna cost you.” And it did.
Within two weeks, stock market values — reflected in our retirement plans — had gone down $1 trillion.
Taxes — on the top 2 percent of taxpayers — had been saved from going up $1 trillion.
And Social Security and Medicare remain unchanged.
Both Republicans and Democrats won their battles, but together lost the war.
Investors are more interested in trust than political ideology.
Fifteen years ago, I was a banker. One of my clients owned six hotels worth $30 million and wanted to borrow $5 million to build a new hotel. There was something about him that just didn’t feel right, so my bank would not make the loan.
Five years ago, a friend of mine incurred some high medical bills that took her four years to repay. She did, but paying late damaged her credit score. Recently, she found a great deal on a house at half the appraised value. She needed to borrow less than half of that half, or about 20 percent of its value, to buy it. No bank will consider making her a loan.
It’s all about trust. Your parents were right when they said, “Please get along with each other.”
We didn’t. It cost us. World financial markets are wondering if the United States can continue to be the pillar of stability upon which they rely.
Was it worth trading our national trust to avoid $1 trillion in tax increases over 10 years and amending Social Security and Medicare? Both are going to happen. Is that $1 trillion the only cost? How long are we going to hang on to rigid political ideologies and drag the country down with it?
Is $1 trillion a bad number or a good number? Hang on for the ride.
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David Post is a co-owner of the Salisbury Pharmacy and an adjunct professor at Georgetown University.