四 川 铁 FourRiverIron

Congress pretends to borrow money from it's, when in reality it is not "borrowing" money, but printing money.

Can you borrow $20 from yourself and use it to buy lunch?

Of course not.

Could you print $20 and use it to buy your lunch?

Damn right! And of course that is what Congress does.

They print the money, and pretend that they are borrowing it.

Of course if YOU printed money, YOU would be thrown in jail for counterfeiting, but when the U.S. Congress prints money to pay for their bills it is legal.

The US National Debt

If the Feds stop rolling the printing presses to pay their bills they will have to increase taxes by 40 percent if they wish to continue spending money at the same rate they currently spend it at.

So why the National Debt? Because it's easier to print money then it is to tax people. When you tax people they get angry and will boot you out of office. When you roll the printing presses most people don't realize they are being taxed, and thus don't get angry.

A book that will open your eyes on this subject is "The Creature from Jekyl Island" - It explains the the history of the Federal Reserve which is the center of this mess.

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U.S. debt default would harm nation as well as individuals

by Dan Nowicki - Jul. 27, 2011 12:00 AM

The Arizona Republic

Many Americans have dismissed the ongoing political brinkmanship over the federal debt limit as just another example of Washington partisan gridlock.

But the consequences of a U.S. default on its financial obligations are potentially breathtaking, from higher interest rates on car loans and credit cards to dramatic cuts in government agencies that affect every aspect of American life.

Experts warn a default on at least some of the government's bills is unavoidable if President Barack Obama and Congress can't come to terms on a deal to increase the debt ceiling before next Tuesday. Capitol Hill is in a race against the clock to find agreement on a solution.

The United States reached its statutory $14.3 trillion debt ceiling on May 16, and the Treasury Department since then has been taking what it calls "extraordinary measures" to stave off default. Starting next Tuesday, the emergency options are exhausted, and there soon won't be enough money to pay the nation's bills.

Although Treasury officials may be able to prioritize incoming revenue to satisfy bondholders, an estimated 40 to 45 percent of the government's other bills would still go unpaid, at least temporarily.

A July analysis by the Washington, D.C.-based Bipartisan Policy Center concluded that the Treasury Department will face an Aug. 3-31 cash deficit of about $134 billion. It will have only a projected $173.3 billion coming in to pay the month's $306.7 billion in expenses.

Because the government borrows roughly 40 cents for every dollar it spends, deep spending cuts are inevitable if the debt crashes into the ceiling and U.S. borrowing power is cut off.

Interest on Treasury securities, which would have to be paid to avoid default, damage to the U.S. credit rating and increased borrowing costs would consume $29 billion of the incoming August revenue, according to the center's analysis.

Although there is no guarantee that the Treasury Department would, or even has the legal authority to, pay the debt first, many analysts believe that it will.

If the roughly $100 billion in Social Security and Medicare/Medicaid obligations are met, tough choices will have to be made about how the remaining $44 billion or so is spent.

National defense, the Justice Department, including the FBI, and other vital government functions likely could not escape unscathed. The federal government shutdowns of 1995-96 would pale in comparison, experts say, because this time even mandatory spending would be affected.

Federal salaries, jobless benefits, Internal Revenue Service refunds and housing and nutrition assistance for low-income families could go unfunded in a worst-case scenario as could departments and agencies such as the Environmental Protection Agency, the Centers for Disease Control and Prevention and the Education Department.

"If the debt ceiling is not raised by August 2, we're not going to default on our debt, but we are going to default on about 50 percent of all of the other payments that the federal government is obligated to make," said Jay Powell, a former undersecretary of the Treasury for finance under President George H.W. Bush and a visiting Bipartisan Policy Center scholar who worked on the analysis.

"We have tried many examples of ways to cut 50 percent of spending, and you can't do it without eliminating many popular and important programs." An archaic exercise?

What is the debt limit? It's not in the U.S. Constitution, and Congress' decision to put a cap on the national debt dates only to a liberty-bond bill passed during World War I. It covers both the publicly held debt and the debt owed because of government raids on the Social Security Trust Fund and similar accounts.

Lawmakers have raised the debt limit 10 times since 2001, according to an April report by the Congressional Research Service, Congress' nonpartisan research arm. There have been past debt standoffs, but in the end, Congress has never failed to lift the ceiling.

Many scholars and experts view the exercise as archaic; no other nation routinely must legislatively lift a debt limit to accommodate its budget spending. Increasing the debt limit is needed just to fund the government's ongoing operations and obligations and by itself does not authorize additional spending.

The federal government's debt ceiling is commonly compared to a credit card's limit. More precisely, it is akin to a situation where a credit-card holder has already spent to the hilt and can't afford to pay off the entire bill.

"It's actually not a bad analogy because you have some of the same risks with a credit card that you have with national debt," said Rep. David Schweikert, R-Ariz., who serves on the House Financial Services Committee, which oversees the Treasury.

"You're subject to the whims of the interest-rate market," he said. "Because, if all of a sudden, interest rates go up, your finance costs go up on your credit card just as they go up on the refinancing of our bonds. And often, you're using today's dollars to pay for last year's purchasing." Spending decisions

Although there should still be more than enough cash coming to satisfy the nation's creditors - those who own Treasury bonds, bills and notes - there is disagreement about whether the Treasury Department actually has the legal authority to pick and choose how the incoming money is spent.

The department has said it doesn't, but the Government Accountability Office, Congress' nonpartisan watchdog agency, has said that it does.

On Tuesday, Schweikert and Sen. Pat Toomey, R-Pa., introduced legislation that would make sure the Treasury Department uses incoming dollars to cover expenses related to debt service, Social Security and the active-duty military.

Even the specter of a bond default could hurt interest rates for Treasury securities. Those interest rates are linked to the interest rates for home mortgages, car loans, credit cards and other financial instruments that American consumers and businesses rely on.

An actual default could have serious long-term ramifications, particularly as the United States continues to struggle with the after-effects of a painful recession.

"Interest rates in the whole economy could really go up," said Paul Posner, a professor at George Mason University in Virginia and a former GAO' director of federal budget and intergovernmental relations. 'Whipsaw effects'

Defaulting on government investors is not the only risk if the debt ceiling is not increased. Just slashing the flow of government spending by 40 to 45 percent could cause economic disruptions.

"This abrupt contraction would likely push us into a double-dip recession," Treasury Secretary Timothy Geithner warned in a May 13 letter to Sen. Michael Bennet, D-Colo.

Geithner was responding to Bennet's request for a Treasury Department assessment of the fiscal and economic ramifications of not raising the debt ceiling.

Posner predicted Americans would soon see just how deeply the federal government is involved in their daily lives, from air-traffic controllers to federal food inspectors. There will be "whipsaw effects that nobody could possibly have anticipated," he said.

"For example, you can't produce meat and have it go to market without an agricultural inspection. You're going to start seeing very weird things happening."

For his part, Schweikert has stayed optimistic and believes that an eleventh-hour deal can be struck.

"That's the nature of legislative bodies and also the nature of big corporate negotiations," Schweikert said. "You haggle and haggle down to the last moment, and that's when you're convinced that either you've gotten as much as you can get or have given away as much as you can give away. And then time closes the deal."

Other onlookers are not so confident. "The people who are responsible for this should not be sleeping," Posner said. "They are messing around with some really important stuff."

Source

Low taxes, high health costs make US choices tough

Posted 7/27/2011 7:31 AM ET

By Paul Wiseman, AP Economics Writer

WASHINGTON — Wealthy countries all over the world are dealing with debts and strained budgets as they mop up after the Great Recession and brace for the budget-busting retirement of the baby boomer generation.

But the United States is in a bigger fix than almost anyone else.

The U.S. federal debt was equal to 95 percent of the overall economy in the first three months of 2011, the fifth-highest on the Associated Press Global Economy Tracker, an analysis of economic and financial data from 30 of the biggest economies.

Every year that the U.S. government spends more than it collects in taxes, it records an annual budget deficit. The $14.3 trillion debt is the sum of all annual deficits and surpluses.

As U.S. policymakers argue over raising the federal borrowing limit and slashing debts, America is hobbled in ways the others are not. Tax collections are low by historical and international standards. Health care costs are astronomical -- and still rising. The political system is gridlocked.

Those problems suggest the current impasse over raising the U.S. government's borrowing limit and cutting the deficit is a prelude to even more intense political combat.

"We as a society will either have to pay more for our government, accept less in government services and benefits, or both," says Douglas Elmendorf, director of the nonpartisan Congressional Budget Office. "For many people, none of those choices is appealing -- but they cannot be avoided for very long."

This year's federal tax revenues are forecast to equal 14.4 percent of gross domestic product, a broad measure of economic output, according to the Office of Management and Budget.

That's the lowest share since 1950, long before Congress approved expensive programs such as Medicare. Tax collections have been reduced by the recession and by tax cuts enacted in 2001 and 2003. Among 29 countries ranked by the Organization for Economic Development and Cooperation, only Japan and Spain take in less tax revenue than the U.S. as a percentage of GDP.

When it comes to health care, the U.S. spends the equivalent of 17.4 percent of its GDP -- by far the highest percentage among wealthy nations. The next highest is the Netherlands, where health care spending equals 12 percent of GDP. Among the 34 wealthy countries that belong to the OECD, health care spending averages less than 9.5 percent of GDP.

Political gridlock magnifies America's debt woes. Among the five biggest countries with a top AAA rating from the credit rating agency Moody's, the U.S. is the only one that hasn't come up with a serious plan to control government debt, says Moody's sovereign debt analyst, Steven Hess.

The U.S. is also the only one of the five that doesn't have a parliamentary system, which allows the ruling party or coalition to pass its agenda undeterred by the opposition. After taking control last year in Britain, for instance, a coalition led by the Conservative Party enacted an austerity program of tax hikes and spending cuts.

The U.S. has a divided government -- Democrats control the White House and Republicans control half of Congress. The effort to narrow annual budget deficits and reduce the debt has bogged down in partisan wrangling.

The AP Global Economy Tracker found most of the wealthy nations of the world struggling with high debt:

_ Japan, which is aging rapidly and has endured more than a decade of economic stagnation, had the heaviest debt burden at the end of the first quarter: 244 percent of GDP. Economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the Peterson Institute for International Finance say anything above 90 percent starts to weigh down economic growth partly by pushing up interest rates. Greece's debt was at 161 percent, Italy's 113 percent, Thailand's 111 percent and the United States' 95 percent.

_ Energy-producing Canada and Norway had some of the lowest debt burdens among wealthy nations at 32 and 31 percent, respectively. The Norwegian government's finances are so strong that it issues debt mainly to ensure it has a functioning debt market and turns a profit by investing the money it borrows, says Nikola Swann, an analyst at credit rating agency Standard & Poor's.

_ Fast-growing developing countries have a big advantage over rich countries when it comes to containing debts. They have younger populations and aren't facing a baby boomer retirement crunch. Brazil (28 percent) and Mexico (27 percent) had light debt burdens relative to GDP.

The U.S. does have a couple of advantages over other rich countries that help it hang onto its top credit rating even as its debts rise and political squabbling over the federal borrowing limit raises the risk of default.

Thanks to a relatively high birth rate and an even higher rate of immigration, the U.S. is aging more slowly than other rich countries. It will have a higher percentage of people working over the next few decades than Europe and Japan. Those workers will pay taxes to finance health care and pension benefits for baby boomers.

Last year, the U.S. had four active workers for every retiree; by 2050, with baby boomers out of the labor force, it will have only two, according to an S&P report on the fiscal impact of aging populations on rich countries. But the countries that are aging fastest -- Japan and Italy -- will have it much worse. An even split between workers and retirees will put enormous strains on their pensions and health care budgets.

Another U.S. advantage: The federal government's debts are all in U.S. dollars, giving America control of its destiny compared with countries that have to pay back debts in another country's currency. The U.S., for instance, can print dollars, driving down the value of the currency. That would make it cheaper to pay back its debts. It would also boost the economy and tax revenue by making American products cheaper around the world and luring foreign investors who build plants and buy real estate.

Cash-strapped Greece, by contrast, is tethered to a common European currency, the euro, and can't take advantage of a weaker currency. It's even worse for countries that owe money in another currency. Their debt payments go up if a currency they have borrowed in rises in value against their own.

Foreigners also like to own dollars, especially in times of crisis. That allows the U.S. Treasury to issue debt at low interest rates.

The U.S. debt burden isn't quite as heavy as it looks at first, either. The federal debt -- $14.3 trillion -- includes money the government has borrowed from itself, mostly revenue from Social Security. Take out the borrowing between government agencies and Uncle Sam's net debt drops to $9.8 trillion, or about 64 percent of GDP.

Some debt analysts consider Australia a model for the way it has controlled its budget and prepared to pay for an aging society. Over the last two decades, Australia cut government spending, imposed a 10 percent tax on most goods and services and sold off state assets including airports and railways. It also prepared to cope with an aging society by requiring employers to contribute toward a pension fund.

As a result, the Australian government's debts were equal to 14 percent at the end of the first quarter, lowest on AP's Global Economy Tracker.

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Debt-limit debate wearing on Americans

By William M. Welch, Judy Keen and Rick Jervis, USA TODAY

Washington's latest stalemate has inflamed partisan passions over federal spending, with the threat of an economic calamity in the balance. Yet across the nation, many people see a wearyingly familiar fight — one they simply want to end.

"Just get it done. Work it out," Nicole McBride, 30, says with a touch of disgust as she lunches Tuesday at Al's Beef, a Chicago institution known for its Italian sandwiches.

Her view is widely shared.

At the renowned Café Du Monde just outside the French Quarter in New Orleans, a vacationing Joe Davis blames Democrats and Republicans equally for prolonging a political fight over whether to again raise a federal debt ceiling that has been raised scores of times before, usually without this level of dispute.

"I'm sick of it," says Davis, 73, a retired economist from San Antonio, as he polishes off an order of beignets on an outdoor patio.

"They're playing games. Here we are trying to pull ourselves out of recession, and they can't come to an agreement," Davis says.

As an Aug. 2 deadline draws closer and Washington's political brinkmanship only intensifies, Americans are discussing the potential consequences of failing to raise the debt ceiling, which authorizes the federal government's borrowing to meet expenses that tax collections aren't sufficient to cover.

Patricia Benner, 66, a political independent from Louisville visiting Palm Springs in the California desert, reflects on the political dilemma that has tied the Capitol in knots.

She worries about President Obama's warning that inaction on the debt ceiling could leave the country unable to issue her monthly Social Security check.

However, she wants to see other types of federal spending cut rather than any taxes raised.

"They could settle this today if they really wanted to," she says, expressing disappointment with all sides.

Finger-pointing all around

As Americans enjoy vacations or simply try to carry on in the midsummer heat, the issue has become an unwanted intrusion into daily life.

The president and the Republican speaker of the House, John Boehner of Ohio, both have appealed to the public and accused the other side of refusing to come to a deal.

During his address to the nation Monday night, Obama warned, "We can't allow the American people to become collateral damage to Washington's political warfare."

Not everyone agrees on what that potential damage may be, or whether inaction would trigger an unprecedented federal default with broad and grim economic consequences for the nation.

Jennifer Dillon, 50, of Palm Springs, says she doesn't know what or whom to believe, but she calls talk about reduced Social Security and Medicare benefits "idle threats."

"I don't know if we're even really hearing the truth about what the ramifications would be," she says.

But the prospects are worrisome for many, even as they lament the nation's growing debt burden, which requires that the federal government devote increasing portions of tax collections to make interest payments.

"I think it will be pretty catastrophic," says David Maciewicz, 22, a recent University of Vermont graduate from Utica, N.Y. "It will destroy the economy if they don't raise the debt ceiling.

"We will not be able to reduce the debt in a week," he says. "Raising the debt ceiling needs to be a non-issue. It needs to be done."

Just before the lunchtime crush at the Napoleon House Bar & Café in New Orleans' French Quarter, the staff debates the debt ceiling issue, discussing different deals on the table and how it all may trickle down to them.

Waiter Jordan Angle, 35, says he doesn't blame congressional Republicans or Democrats — he blames the American people.

"We could blame our leaders all we want," he says. "But ultimately it's Americans living beyond their means that ran up so much debt."

Angle says the standoff could lead to a faltering economy and fewer people spending money at his bar.

More likely, he says, is that both sides will strike an agreement eventually. Inactivity from leaders doesn't spook or surprise him.

"Living in New Orleans, we're very used to nothing getting done," Angle says.

Braxton Moody, owner of Rita's Tequila House on Bourbon Street, is concerned about the impasse hurting his business. Just talk of the possibility of the country's credit rating being downgraded is harming the economy, he says.

His biggest fear: banks freezing credit.

"If banks can't loan, I can't grow," Moody, 37, says of his business, which boasts 135 different types of tequila on its menu.

'It's a power play'

In Chicago, McBride and Daryl Herman talk a lot about the debt ceiling crisis that's roiling Washington, and the couple is frustrated with pretty much everyone involved.

"It's a power play. It's about the Republicans showing their muscle and the Democrats showing their muscle," McBride says. Obama, she says, is being too diplomatic.

Herman, 31, a social worker, says regular people who already are having a tough time in this economy shouldn't pay a price.

"It's all about people at the end of the day," he says.

Jim Brown, 67, a semi-retired restaurant worker who with his wife, Linda Brown, 60, splits his time between Chicago and Maine, says he has a personal stake in the outcome of the wrangling.

He depends on his Social Security check and worries that increased taxes on business would affect the Maine restaurant where he works.

"We don't want the country to default by any means," he says. "We want what's coming to us."

"They need to get it done," says Linda Brown, a teacher. "And don't touch Medicare or Social Security!"

Tom Lauer, 51, who works in finance, says, "It's all just politics. I don't think that right now people are making decisions for the right reasons."

Lauer says government spending must be curbed, and he doesn't like the idea of precluding tax increases from the wealthy and corporations.

"You have to find a combination of both," he says.

A stake in the debt debate

Melanie Givens, 36, knows she has a personal stake in the fight. She lost her health care job in 2008 and found a new one recently that pays $40,000 less each year. That experience, she says, convinced her of the importance of paying your bills and staying out of debt.

She's disappointed with the congressional leadership of both parties, especially Republicans, whom she says have been "hijacked" by the no-tax, less-spending Tea Party.

She wishes Obama would "get the American people riled up and continue to call out the Republicans on their hypocrisy. Call their bluff."

In Minnesota, Robert Helland of Sauk Rapids, an optical company owner, says federal spending is out of control.

However, the self-described conservative Republican says the debt ceiling must be raised now, even if only for six months. He wants to cut foreign aid and welfare — although eliminating both programs still wouldn't amount to enough savings to stave off the need for borrowing.

Steve Whipple, who works in St. Cloud, Minn., says the debt ceiling definitely should be raised.

"It's been raised every time in our history that it needed to be raised," says Whipple, who considers himself an independent. He says the debate is the product of "political people trying to make political points instead of trying to govern."

Taylor Mason, 20, a student at University of South Carolina-Beaufort, is spending his summer working for Rep. Michele Bachmann's Republican presidential campaign.

Mason opposes lifting the debt ceiling, thinks that compromise isn't the solution, and wants to see reduced spending on health care for seniors and other benefits programs.

"I don't think the debt ceiling needs to be increased. I just think we need to spend less," Mason says. "Everyone's caught up in this word 'compromise.' There was no compromise in spending this money. … I think we need to cut Medicare and some of the other entitlement programs. People have gotten used to government programs providing for everything."

But in North Carolina, David Wijewickrama, 42, a lawyer and Democrat from Waynesville, says that if the debt ceiling is not raised, "There will be catastrophic, irreparable damage."

"I believe our economy will face irreparable harm," he says. "Unemployment will increase, and I believe investing houses will devalue the U.S. government's commitments."

He calls the debate in Washington "disgusting election politics."

"What we need is an honest discussion," Wijewickrama says. "Both parties are responsible for the debt. Both parties need to take ownership of the debt."

I have absolutely zero faith in our government masters and their worthless money that isn't backed by gold or anything else of value. But my opinion of the government isn't what counts.

How investors react to Congress handling of the National Debt is what will count, or more importantly what they do will effect the market. And that is discussed here.

Source

Investors, Worried About Debt Talks, Look for Havens

By ERIC DASH and NELSON D. SCHWARTZ

Published: July 27, 2011

Think of it as the flight to safety every investor would like a seat on. The only problem? Nothing is taking off.

Investors are seeking alternatives to United States Treasury bonds as worries escalate that lawmakers will fail to reach an agreement to rein in the deficit and raise the federal debt limit in the coming days. Some have shifted funds into corporate bonds, others are forgetting about yields entirely and parking their money in cash, and more are looking to those classic safe havens of yore, gold and the Swiss franc.

Investors are getting leery of stocks, however. Shares dropped on Wednesday amid growing worry about the deadlock in Washington and the economic outlook for the country. The broader market as measured by the Standard & Poor’s 500-stock index closed 2.03 percent lower, or 27.05 points, to 1,304.89. The Dow Jones industrial average was down 198.75 points, or 1.59 percent, to 12,302.55, its fourth straight decline.

Still, Treasury bond prices remained firm on Wednesday, with the benchmark 10-year bond rising two basis points to 2.98 percent. That shows demand is still healthy for the roughly $10 trillion of United States government debt circulating in the global financial system.

Investors are concerned that a downgrade of United States government debt by the rating agencies, or even the more remote possibility of a default, would erode the value of Treasury securities, which have long been considered virtually risk-free. The trouble is that in the end, safety is hard to find.

“Where are you going to go?” asked Carl Kaufman, who helps manage just under $2 billion at the Osterweis Strategic Income fund in San Francisco. Mr. Kaufman said he was loading up on high-yield bonds, like those issued by HCA, the hospital operator, and Dollar General, the retailer.

Other institutional investors are looking to faster-growing emerging markets.

Daniel Arbess, manager of the $3 billion Xerion fund at Perella Weinberg Partners in New York, is investing in companies that are benefiting from strong growth overseas, especially in countries like China and other Asian markets. Another strategy he favors is investing in natural resources and precious metals like gold that will preserve their worth even if paper currencies decline in value.

“These are our safe havens, not U.S. Treasuries,” he said. “You’ve got to hold your positions with conviction and concentrate on the fixed points on the horizon.”

Gold, already trading near record levels, dipped slightly Wednesday to close at $1,615 but is still up about 40 percent from a year ago. The Swiss franc, another classic refuge for safety-conscious investors, has jumped nearly 17 percent this year versus the United States dollar.

Other traditional havens, including stock and currency markets in Japan and Europe that might have been tempting in the past, are hardly appealing today, given the slow growth and mushrooming debt problems in those areas.

“Safety is a relative concept,” said Tobias Levkovich, chief equity strategist at Citigroup. “There have to be alternatives and the alternatives aren’t that wonderful.”

Corporations are also striking a defensive posture, stockpiling cash at record levels. And as the deadline for Washington to reach an agreement on raising the debt ceiling nears, many could start taking action, according to a survey this month of 305 large corporations by the Association of Financial Professionals.

Nearly one-quarter of the companies said they would sell some or all of their holdings of Treasury securities, while another 28 percent said they would not add Treasuries to their portfolios. A little fewer than half of the companies said they would not make any significant changes to their positions.

Even though default on government debt remains a remote possibility, some companies are already trying to get out in front of the market jitters. Capital One Financial, for example, moved up a $5 billion sale of billions in stock and bonds to avoid possible turbulence ahead of the Aug. 2 deadline the Treasury had set for lawmakers to raise the $14.3 trillion debt ceiling.

Money market funds, which traditionally have big holdings of short-term Treasury bills, are increasing their cash positions in anticipation of possible investor redemptions, said Joseph Abate, money market strategist at Barclays Capital. Government-only money funds are now holding about 70 percent of their assets in securities that mature in less than a week, up from nearly 50 percent three months ago.

The funds are shifting more of their assets into securities with a duration of one day, rather than run the risk of holding positions for a week or longer. They are also steering clear of government notes that are due in the first two weeks of August, fearful that a breakdown in the debt talks could force the government to miss a payment.

“The anxiety level around potential money fund redemptions is certainly higher than it’s been,” Mr. Abate said Wednesday.

Fears of a potential government default are showing up in the derivatives market, too.

For instance, there are 4.9 billion euros worth of derivatives known as credit-default swaps, which insure against a default of government debt and will most likely pay out if the nation does not make its bond payments. That is 1 billion euros higher than in May, according to the Markit Group, a financial data firm based in London. As the summer has progressed, the cost of buying that sort of insurance, which is essentially a bet that the United States government will default on its debt, has risen to 84,000 euros a year ($121,450) to insure Treasuries valued at 10 million euros, up from 35,000 euros ($50,600) in June.

Along with credit-default swaps, big investors and corporations are also eyeing so-called political risk insurance, which pays out in a government default.

In the past, customers largely inquired about coverage for developing countries, like Nigeria or Kazakhstan. Two years ago, they called about Greece, Portugal, and Spain.

But in the last few months, some foreign investors who rely on the government’s clean-energy subsidies to profitably develop wind and solar farms have asked the insurance giant Marsh & McLennan about political risk coverage on payments made by the United States.

“Out of the blue, this has come to my desk,” said Stephen Kay, senior vice president for the political risk division of Marsh.

Retail investors are largely staying on the sidelines, at least for now. Some, according to interviews with brokers and asset managers, are moving into six-month and one-year certificates of deposit.

Source

Treasury to Weigh Which Bills to Pay

By BINYAMIN APPELBAUM

Published: July 27, 2011

WASHINGTON — The Treasury Department is preparing to answer a question that it has dodged and rebuffed for months: If there’s not enough money for everyone, who is left empty-handed?

Officials said Wednesday that the department would address the issue later this week unless it became clear that Congress would vote by Aug. 2 to let the government borrow more money.

The outlines of the answer, however, already are clear. Officials have said repeatedly that Treasury does not have the legal authority to pay bills based on political, moral or economic considerations. It cannot, for instance, set aside invoices from weapons companies to preserve money for children’s programs.

The implication is that the government will need to pay bills in the order that they come due. President Obama has warned as a result that the government “cannot guarantee” payments of Social Security benefits or other popular programs. Officials also have disputed the assertion of some Republicans that the government could prioritize interest payments.

Several independent analysts estimate there is enough money on hand to pay the bills until Aug. 10. Treasury has declined to provide its own estimate.

“You’re basically running on fumes from midnight Aug. 2 forward,” the White House spokesman, Jay Carney, told reporters Wednesday.

With time running short, a planning process that began early this year with small meetings that even participants did not take entirely seriously has grown into a consuming preoccupation.

The Treasury secretary, Timothy F. Geithner, continues to meet with staff still working on other issues. On Thursday morning he is scheduled to meet the president of the Ivory Coast, Alassane Ouattara. But most of Mr. Geithner’s time is now devoted to advising the president and bracing the department.

The technical challenges are formidable. The government keeps its cash on deposit at the regional banks of the Federal Reserve, which issue payments at Treasury’s direction. The process, largely automatic, must be adjusted to allow for human intervention.

Officials also are starting to address the consequences likely to flow from a disruption in payments.

The federal agency that oversees national banks said Wednesday that it would tell banks to “exercise judgment” before penalizing customers who overdrew their accounts because money from the government that did not arrive on schedule.

Source

Struggling with debt, Congress talks defense cuts

Posted 7/29/2011 7:35 AM ET

By Donna Cassata, Associated Press

WASHINGTON — Once unthinkable in a time of two wars, Democrats and Republicans alike are insisting that the billions spent on the military can be significantly cut back over the next decade as the nation struggles to reduce its spiraling debt.

Senate Majority Leader Harry Reid's plan to slash spending and increase the government's borrowing authority would cap spending by the Pentagon and other government agencies at $1.2 trillion. Conservative Sen. Tom Coburn of Oklahoma has called for just over $1 trillion in defense cuts in his "Back in Black" plan, including fewer weapons, fighter jets and personnel. A bipartisan group of six senators envisions reductions of more than $800 billion in 10 years.

The proposals reflect a rare bipartisan consensus driven by a dire economic outlook. The numbers even outpace what a Democratic commander in chief called for earlier this year. In April, President Barack Obama instructed the Pentagon to find $400 billion in defense savings over 12 years and said no decisions on specifics would be made until the Pentagon had completed a review of options for achieving such reductions.

No matter which plan emerges in the latest debt showdown -- Reid's or the House GOP plan by Speaker John Boehner, R-Ohio -- both call for creation of a 12-person, House-Senate bipartisan committee to find trillions in deficit cuts. Defense spending will be a ripe target, especially since the money would come from cuts in projected increases. Defense budgets, not including the costs of the wars in Iraq and Afghanistan, consistently have gone up in recent years, from just over $370 billion in the late 1990s to around $550 billion today.

Military leaders and lawmakers on the congressional committees overseeing the Pentagon warn of creating a "hollow" fighting force.

Army Gen. Martin Dempsey, Obama's choice for chairman of the Joint Chiefs of Staff, told a Senate panel this week that cuts of $800 billion or more "would be extraordinarily difficult and very high risk." Leaders in the Marine Corps, Air Force, Army and Navy told a House panel that cuts of that magnitude would force them to restructure their respective services and cause problems meeting the demands of commanders in the field.

"I'm deeply concerned that hasty across-the-board cuts will dramatically affect our safety and security of the men and women serving," said Sen. Scott Brown, R-Mass.

Rep. J. Randy Forbes, R-Va., said he worries "about our state of readiness, not for mastheads on the horizon or columns of tanks rolling toward us, but for the looming defense budget cuts many in this Congress seem willing to inflict on our military."

Facing critical votes on debt-limit bills, Senate Armed Services Committee Chairman Carl Levin, D-Mich., said in an interview that he backed Reid's legislation "even though I think it is an aggressive number for defense."

Reid's bill would start with caps on spending on defense, intelligence and veterans at $606 billion in the fiscal year beginning Oct. 1 and $607 billion the following year. The caps would essentially pare back the increases in military spending, standard for an agency that deals with long-term contracts for multimillion-dollar weapons and programs. Separately, he counted some $1 trillion in savings from eventually winding down the wars in Iraq and Afghanistan.

The demands for defense cuts come as Republicans fiercely oppose increases in taxes and Democrats say hands-off on entitlement programs such as Social Security and Medicare. That leaves the billions for defense and the scores of other government programs, from education to transportation to agriculture, for reductions as the nation grapples with a $1.5 trillion deficit.

"If Republicans are taking revenue completely off the table, it's unavoidable that defense, which is 20 percent of the budget, is going to face some significant reductions to get our deficit under control," Rep. Adam Smith of Washington, the top Democrat on House Armed Services, said in an interview. "It has to be on the table in any event, but once you take revenue off the table, defense is in serious trouble. That concerns me, but our deficit concerns me as well."

Smith said many in Congress were "brutally in denial" about how to solve the fiscal problem.

Although the long-range proposals favor significant defense cuts, many Republicans and Democrats have been reluctant this year to vote for reductions. Earlier this month, the House overwhelmingly backed a $649 billion defense spending bill that boosted the Pentagon budget by $17 billion. The legislation included $119 billion for the two wars. During debate, the House easily turned back efforts by liberal Democrats and tea party Republicans to slash billions.

Still, tea party-backed Republicans have prevailed on occasion, most notably in February when they led the effort to eliminate funds for a second engine for the next-generation F-35 fighter plane.

John Isaacs, executive director of Council for a Livable World and Center for Arms Control and Non-Proliferation, said if "tea party Republicans were willing to cut defense spending, it would give more courage to Democrats" worried about the weak-on-national security label they've often faced since the Vietnam War."

At the Pentagon, Defense Secretary Leon Panetta, who served as director of the White House's Office of Management and Budget, is overseeing a review of the consequences of budget reductions of $400 billion and above. Panetta's predecessor, Robert Gates, initiated the review and it would include an assessment of what changes in defense strategy would be required as a result of such cuts and how they would affect military capabilities.

The review could be completed by the end of the summer.

Source

Debt-ceiling outcome as unclear as ever

Posted 7/29/2011 8:06 AM ET

By Charles Babington, Associated Press

WASHINGTON — Demoralized House Republicans are trying for a third straight day to pass a debt-ceiling bill that has almost no chance of surviving the Senate, even as the clock ticks closer to next week's deadline for avoiding a potentially calamitous government default.

House Speaker John Boehner, R-Ohio, suffered a stinging setback Thursday when, for a second consecutive day, he had to postpone a vote on his proposal to extend the nation's borrowing authority while cutting federal spending by nearly $1 trillion.

"Obviously, we didn't have the votes," Rep. David Dreier, R-Calif., said after Boehner and the GOP leadership had spent hours trying to corral the support of rebellious conservatives.

Republicans will try again Friday. If they continue to fail, then President Barack Obama and Senate Democrats will have extensive leverage to shape a bill to their liking and practically dare the House to reject it and send the nation into default.

If, however, Republicans can get Boehner's version through the House, a rapid and complex set of choices will determine whether and how a debt crisis can be averted. House Republicans will be under tremendous pressure to pass something, even if they have to make it so appealing to their right wing that the nation's independents and centrists will laugh it off. As Thursday's events proved, nothing is guaranteed.

Rep. Vern Buchanan, R-Fla., a member of the House Ways and Means Committee, said Friday morning he believed Boehner was "very close" to having the necessary votes for passage the second time around.

"I'm confident the speaker will get there today," he said in an interview on MSNBC. Buchanan said conservatives have been wary of the various rival debt-limit bills because "people don't trust the process."

Nevertheless, Buchanan said "there's been some momentum" in Boehner's direction since late Thursday and into the day. He said he'll vote for the bill, but warned, "The bottom line is, we're willing to raise the debt ceiling, but at the same time we want to make sure the cuts are delivered."

The main area of dispute between the two parties is how to encourage or guarantee big spending cuts in the future without rekindling a fiercely divisive debt-ceiling debate such as the one now raging.

Interviews with well-placed insiders suggest the following road map, assuming Boehner can get his bill out of the House:

The Democratic-controlled Senate would kill it quickly. The focus then would fall on the Senate's two leaders, Democrat Harry Reid of Nevada and Republican Mitch McConnell of Kentucky. They must decide whether they can reach a compromise that can pass the Senate -- where a united GOP can kill bills with filibusters -- and then pass the House and be signed by Obama. The White House would be integral to such talks.

Republican officials say McConnell could hold a strong hand, despite the House's shaky performance. He could argue that the House finally passed a bill to raise the debt ceiling, while the Senate has done nothing but kill that bill. If Tuesday's deadline passes with no resolution, Republicans say, voters will blame Democrats.

Under this thinking, the Senate would pass a measure similar to the House bill, perhaps with minor changes to save face and give political cover to Democrats who vote for it. The House would quickly concur, with numerous Democrats and all but the most conservative Republicans voting aye. Obama would have no choice but to sign it.

Democrats say the opposite is true. Obama has persuasively argued in recent weeks that Republicans are unreasonably demanding, they say.

Democrats control the Senate and White House. If Republicans insist that a partisan, House-passed bill is the only vehicle, then public anger will fall on them, this thinking goes.

The biggest sticking point is the House bill's call for congressional votes to raise the debt ceiling, in two stages, before the 2012 elections.

A $900 billion debt-limit hike would come first, coupled with $917 billion in spending cuts over 10 years. A second vote, late this year or sometime next year, would allow another $1.6 trillion in borrowing power, provided that Congress and the president have agreed to another round of spending cuts of that amount or more.

Obama has consistently rejected this condition. He says it would hurt the economy and touch off another ferocious political fight over the debt ceiling, which Congress previously raised with little fuss year after year. Global markets and investors would not be reassured by such a drawn-out, uncertain scenario, he says.

The White House says the prospect of an economically devastating default must not be used as the "trigger" to force Congress to cut the deficit. Such triggers would take effect automatically if Congress did not act on a prescribed deficit-reduction package.

Those could include deep cuts in programs such as Medicare and Medicaid, which would be painful to Democrats, and tax increases that Republicans would be loath to accept. But Republicans believe the threat of default is a much stronger incentive to shrink the deficit.

Presidential adviser David Plouffe told MSNBC on Thursday that the Republican House bill would "have this whole debt ceiling spectacle, three-ring circus ... repeated again a few months from now, over the holidays. You know, the debt ceiling debate would ruin Christmas."

If the House sends Boehner's bill to the Senate, a crucial point in the end-game scenario will come when McConnell decides whether to insist on the House proposal to raise the debt ceiling in two steps, both tied to large mandatory spending cuts. If he does, then Reid and Obama will have to decide whether to swallow the demand or let the impasse last beyond Tuesday, and blame McConnell.

Or, McConnell could yield. He could help pass a Senate bill that lets the second debt-ceiling hike take place more easily, with an incentive mechanism for spending cuts that stops short of a mandate.

That would hand a tough choice to Boehner. His tea party conservatives would howl in protest. It's possible that 100 or more of his 240 House Republicans would vote against such a Senate-passed bill.

The measure presumably would pass anyway, with ample Democratic votes. But Boehner's hold on the speakership could be weakened.

Of course, little or none of this might transpire if the House can't figure out how to pass a bill. In that case, Obama would seem to hold almost all the cards.

___

Associated Press writers Alan Fram, Jim Kuhnhenn and Ben Feller contributed to this report.

The debt limit is a farce - Congress has already SPENT the money - "Raising the debt limit ... just lets the government pay for spending that Congress has already approved"

[the] government ... has to borrow about 40 cents of every dollar it spends - Think of a family that earns $60,000 a year, but spends $100,000 every year. That's how the Federal government operates.

A family that operated like that would have to borrow $40,000 a year to pay its bills. Of course the Feds just print the money.

"All we have to do is tax the rich" - Taxing the rich would only raise "0.2% of the $9.5 trillion in deficits projected by the Congressional Budget Office"

I don't agree with this editorial, but it does point out how badly our government has screwed things up.

Misinformation mars debt-ceiling battle

Editorial: Misinformation mars debt-ceiling battle

By Karen Bleier,, AFP/Getty Images

In a scant few days, the government will be unable to pay all its bills, and instead of solving the problem — which shouldn't really be all that tough — Washington is caught up in an escalating game of chicken over the federal debt limit. Perhaps there will be an 11th-hour deal. It's not unusual. But rarely is a deadline pushed this hard with this much at stake — or with so much confusion and misinformation. As you listen to the fiery rhetoric, here are five leading myths about the debt ceiling to keep in mind:

The debt limit is a blank check. Perhaps the most destructive misinformation about raising the limit is that it would give the president a "blank check" for more wasteful spending.

Raising the debt limit —something that has been done 49 times under Republican presidents and 29 times under Democratic presidents since 1960 — just lets the government pay for spending that Congress has already approved: interest on the national debt, Social Security benefits, paychecks for soldiers in Iraq and Afghanistan, tax refunds, highway construction and so on. Think of it this way: Refusing to raise the debt limit is like going to Best Buy, bringing home a 50-inch flat panel TV — and then arguing that you shouldn't pay the credit card bill.

Not raising the debt limit puts President Obama in the bizarre situation of either not spending money that Congress already told him to spend, or attempting to spend money and exceeding the ceiling. Either way, he fails to execute the law.

The time to get tough about deficits is when the tax and spending decisions are made in the first place, not when the bills are coming due.

'Default' warnings are just a scare tactic. Many of the Republicans who oppose lifting the debt limit have dismissed as phony the administration's warnings that failing to raise the limit will force the nation to default on its debts. Freshman Rep. Joe Walsh, R-Ill., turned himself into a Tea Party hero when he put a videotape of himself on YouTube in which he says, "President Obama, quit lying!"

It's true that the Treasury Department could probably avoid missing any interest payments on the national debt by making those payments the top priority for federal spending. Even with no more borrowing authority, Treasury would continue to collect more than enough tax revenue to cover debt interest and some of the nation's other bills.

But a study by the respected Bipartisan Policy Center concluded that if the debt limit is not raised, Treasury will have to reduce federal spending by about 44%, forcing enormous, rapid cuts. It might be technically possible to keep paying bondholders in Beijing and Brussels while delaying or stopping some payments to American seniors, troops or businesses. But that wouldn't be politically sustainable for long once voters saw what was going on. There would be a default, and those who deny the inevitability are also in denial about the dire consequences, which takes us to our next myth.

Failing to raise the limit is not that big a deal. Sen. Pat Toomey, R-Pa., has said that failure to increase the debt ceiling might cause some "disruption" similar to a "partial government shutdown." If only. The Bipartisan Policy Center study concluded that the 44% cut in federal spending would mean that "handling all payments for important and popular programs (such as) Social Security, Medicare, Medicaid, defense, active duty pay … (would) quickly become impossible."

Economically, forcing such a rapid reduction in spending in the midst of a weak economic recovery would be downright stupid. It would cost hundreds of thousands of people their jobs (in both the public and private sectors). The nation's Triple-A credit rating would be downgraded, increasing borrowing costs on the nation's massive debt. Because state, consumer and business loan rates are tied to the rate the federal government pays, everyone's borrowing costs would go up. That could plunge the nation back into recession — or worse. No wonder Federal Reserve Chairman Ben Bernanke, top bankers and a host of corporate leaders are pleading with Congress not to let this happen.

Aug. 2 isn't a real deadline. The federal government actually hit its $14.3 trillion borrowing limit back on May 16. Ever since, Treasury officials have been shifting money around in federal accounts to sustain a government that has to borrow about 40 cents of every dollar it spends. In May, Treasury forecast that it would run out of options for doing that on Aug. 2. Treasury insists it's a hard deadline, but various analysts have estimated that the government might have enough cash to last as much as another week or so, to Aug. 10.

Who's right? Who knows? The crucial fact here is that Treasury will run out of options very soon. Once it does, the Bipartisan Policy Center says, officials will have "no secret bag of tricks to finance government operations."

If Congress and the White House don't cut a deal, some legal experts say, Obama could assert authority under the 14th Amendment ("the validity of the public debt of the United States… shall not be questioned") without approval from Congress. That would likely provoke more political chaos, a legal confrontation and quite possibly an attempt to impeach the president by the same hard-liners who reject compromise now. An impeachment process amidst extraordinary economic challenges and two wars is about the last distraction the nation needs.

All we have to do is tax the rich. In his speech Monday night, the president again played the class warfare card, railing against tax loopholes for corporate jets and hedge fund managers. Those loopholes deserve to be closed, and they represent the absurd extreme of the Republicans' anti-tax pledges. But the tax loopholes represent a minuscule part of the debt problem. Ending them would raise about $18 billion over 10 years, or 0.2% of the $9.5 trillion in deficits projected by the Congressional Budget Office.

More broadly, Obama continues to insist any tax revenue in a plan to cut the deficit (and raise the debt limit) should come only from those who make more than $250,000 a year. Obama locked himself into this formula when he was running for the White House, but here's one campaign promise he should find a way to drop.

Hiking taxes on the wealthy enough to provide $1 of revenue for every $3 of spending cuts under a balanced plan would mean raising the top tax rate from the current 35% to well more than 50%, according to calculations based on a Tax Policy Center analysis. That's both unfair and politically unrealistic. In the end, real deficit reduction will require some give from just about everyone.

As it is, none of the surviving plans on Capitol Hill calls for tax increases or for significant changes in the benefit programs that are driving future deficits. Both are necessary. This suggests one more myth — that debt-ceiling brinksmanship is a good way to bring about needed change or run a country.

I suspect one reason the state governments don't force the Federal government to limit it's spending to stuff that is Constitutional is because the states get a huge cut of the money the Feds are illegally spending.

"Jeff Hurley, a policy analyst for the National Conference of State Legislatures, said states would only be able to last a few days without federal funding"

"Arizona’s economy gets $14 billion in federal funds each year" [That is about $38 million a day, or about $6 a day for every person in Arizona]

State governments LOVE federal pork!!!!!

States wait and worry about budget impact, as federal debt deadline nears

Posted: Friday, July 29, 2011 5:48 pm

By ANTHONY DEWITT Cronkite News Service East Valley Tribune

WASHINGTON – Arizona’s economy gets $14 billion in federal funds each year, which has officials in Phoenix keeping a nervous eye on negotiations in Washington over the federal debt limit.

If Congress does not reach a debt-limit deal by Tuesday’s deadline, state governments could face budget shortfalls or more difficulty issuing bonds to pay for roads, hospitals and water systems.

“The point is we won’t know until Congress and the president give some direction on how they will allocate dollars,” said Matthew Benson, a spokesman for Gov. Jan Brewer.

Benson noted that more than half of the federal funds to the state go to the Arizona Health Care Cost Containment System — the state’s Medicaid program. He added that federal money also goes to schools and transportation, and to social services like food stamps through the Department of Economic Security.

He said some Arizona agencies might be able to cover for lost federal funds for a short time, but no one is really sure what will happen.

No one knows what the federal treasury will or will not pay after the debt-limit is passed Tuesday: The federal government will still bring in enough in taxes to pay about 60 percent of its bills for the month.

But no reduction is good for the states. Unlike the federal government, states are constitutionally required to pass balanced budgets and cannot borrow money to close budget shortfalls, according to the Pew Center on the States, a public policy research group. A loss of federal funding could overwhelm many state budgets.

Jeff Hurley, a policy analyst for the National Conference of State Legislatures, said states would only be able to last a few days without federal funding. After that, the lack of federal aid could do budget damage to cities and states, which are already in a delicate position from the recession.

“States have been in fiscally perilous situations the last five years,” Hurley said.

Budget experts worry that the effect of a federal default could ripple through state economies, damaging the national recovery if an agreement is not reached.

Brian Sigritz, director of fiscal studies for states at the National Association of State Budget Officers, said that the longer states are cut off, the larger the impact would be on the overall economy.

“On an economic standpoint, the economy could flatten back into a recession,” Sigritz said.

A federal government default could also do more than take money out of state coffers — it could add to states’ bills at the same time, by making it more expensive for governments to issue the bonds they need to pay for projects.

Moody’s Investors Service is one of the credit agencies that has hinted at a possible downgrade of the United State’s Aaa credit score. It is also looking at states’ bond ratings.

Arizona has an Aa3 score, not Moody’s highest score but still ranked as investment-worthy. But Moody’s said in a first-quarter report that Arizona’s credit status was changed from stable to negative because of the state’s “financial weakness” and “revenue underperformance.”

Authors of the Pew report pointed out that an increase in interest rates could threaten funding for government capital projects.

“State and local governments issue debt to pay for capital projects that provide services and create jobs,” said Sarah Emmans, a Pew research manager and author of the report.

She said that a national default could result in a gridlock of capital markets and municipal debt. With higher interest rates, states would have to find alternatives to fund public works projects or just forgo them all together, Emmans said.

The one bright note in the Pew report for local governments is the suggestion that investors wary of buying federal instruments because of the possible credit downgrade could see municipal bonds as a more sound investment.

Moody’s spokesman David Jacobson said it would be unusual, but not impossible for a state to have a higher rating than a sovereign nation. But he said a threat to the sovereign — like the debt limit the U.S. faces — would be sure to impact the sub-sovereign, which can include both corporations and states.

“No matter what rating you have, you’re going to be affected by any sort of risk to a sovereign,” Jacobson said.

Anthony DeWitt is a reporter for Cronkite News Service

Our dysfunctional Congress!

Op-Ed Contributors

Our Unbalanced Democracy

By JACOB S. HACKER and OONA A. HATHAWAY

Published: July 31, 2011

OUR nation isn’t facing just a debt crisis; it’s facing a democracy crisis. For weeks, the federal government has been hurtling toward two unsavory options: a crippling default brought on by Congressional gridlock, or — as key Democrats have advocated — a unilateral increase in the debt ceiling by an unchecked president. Even if the last-minute deal announced on Sunday night holds together, it’s become clear that the balance at the heart of the Constitution is under threat.

The debate has threatened to play out as a destructive but all too familiar two-step, revealing how dysfunctional the relationship between Congress and the president has become.

The two-step begins with a Congress that is hamstrung and incapable of effective action. The president then decides he has little alternative but to strike out on his own, regardless of what the Constitution says.

Congress, unable or unwilling to defend its role, resorts instead to carping at “his” program, “his” war or “his” economy — while denying any responsibility for the mess it helped create. The president, on the defensive, digs in further.

Take recent events in Libya. The president didn’t try very hard to get Congress to agree to the intervention, some say, because he didn’t think he had the votes. Congress, for its part, has been unwilling or unable to defend its constitutional and statutory power to authorize a war.

In a single day, the House voted down a resolution that would have approved the war and then, just hours later, voted down a bill that would have denied the president the power to spend any new money on the war. Not surprisingly, the war continues without a single Congressional vote to support it, and Congress’s power to authorize military action has taken a hit from which it may never recover.

The problem is not limited to war. For decades, presidents have been making more frequent use of executive orders, signing statements and agency regulations, as well as sole executive agreements with other nations (instead of treaties or Congressionally authorized international agreements).

Earlier this year, the Environmental Protection Agency began regulating greenhouse-gas emissions at some energy plants and factories after efforts to address the problem through legislation stalled. Members of Congress were angry about the end run, but, predictably, they failed to do anything about it.

The ultimate consequence in each case is the same: Congress is saved from its inability to govern by being cut out of the process. Senators and representatives avoid taking responsibility for the most important decisions, and thus can’t easily be held accountable for poor choices.

Meanwhile, the president gets a poisoned chalice: increasing unilateral power, but reduced ability to share responsibility — or blame. Whether President Obama or members of Congress would bear the greater pain if the economy imploded because of a default is unclear. Either way, 535 legislators would have essentially gone AWOL.

It doesn’t have to be this way. It is time to pursue reforms that allow Congress to act effectively. While it’s easy to assume that more checks are always desirable — that the harder it is to make policy decisions, the better they will be — the debt crisis shows this isn’t true.

Failing to raise the debt ceiling stops money already approved by Congress from being spent. If lawmakers see the debt ceiling as real, they will exercise less judgment in the ordinary budget process, on the reckless belief that fiscal restraint can somehow be imposed down the road.

Legislative obstacles like the debt ceiling are a source of mischief, not precaution. They aren’t found in the Constitution; they were put in place by previous Congresses seeking to tie the hands of their successors. Far from encouraging more responsible governance, they often have the opposite effect.

Unnecessary supermajority requirements are another culprit — the Senate filibuster chief among them. It has been transformed over the last generation from an extraordinary step taken by disgruntled minorities into a hard-and-fast “rule of 60” that makes compromise extraordinarily difficult. And when Congress fails to meet this extra-constitutional threshold, it is no surprise that the president tries to work around it.

Fast-track procedures that limit amendments and require an up-or-down vote may appear to limit Congress’s power, but could actually strengthen it by discouraging the executive from going it alone. If prior debt-ceiling legislation had included a fast-track provision, with an automatic increase that would go into effect in the case of inaction, much of the acrimony and brinkmanship of the past few months could have been avoided.

After the debt crisis ends, the democracy crisis must be tackled. Nobody wins when our constitutional system falters: not the president, who gains unilateral power but loses a governing partner; not Congress, which gets to blame the president but risks irrelevance; and certainly not the American people, who have to bear the resulting dysfunction.

Jacob S. Hacker is a professor of political science at Yale. Oona A. Hathaway is a professor of international law at Yale.

It's all hot air. They are pretending to save us from a crisis they created!

Source

Debt crisis averted; new fight looms

U.S. debt: Ideological divide remains for panel charged with cutting deficit

by Lori Montgomery - Aug. 3, 2011 12:00 AM

Washington Post

WASHINGTON - The Senate on Tuesday overwhelmingly approved a plan to raise the federal debt limit and cut government spending, ending a bitter partisan stalemate that had threatened to plunge the nation into default and destabilize the world economy.

One day after a climactic vote in the House, the Senate easily approved the measure, 74-26, with significant majorities of both parties supporting it.

President Barack Obama promptly signed the measure and submitted a formal request to Congress to lift the $14.3 trillion debt ceiling, instantly giving the Treasury $400 billion in additional borrowing power.

With the immediate crisis averted, Obama and congressional leaders quickly turned their attention to the next front in the war over the federal budget: a new legislative committee that will be tasked with developing a broader plan to control the government's debt.

The bipartisan panel, to be named this month, is likely to confront the same ideological divide that caused an almost crippling impasse in the debate.

Republican leaders are warning that they will not include anyone on the panel who is willing to raise taxes, prompting Democrats to threaten a hard line against cuts to Social Security and Medicare benefits.

Foreign investors and economic analysts view further action as crucial to restoring the United States' financial reputation.

On Tuesday, critics in China and elsewhere warned that the initial debt-cut package, which would cut about $1 trillion from agency budgets over the next decade, is too modest.

Moody's Investors Service said the United States will retain its AAA bond rating. However, the agency put a "negative" outlook on the rating, raising the specter of a future downgrade.

Meanwhile, the package did not cheer the stock market, which tumbled more than 2 percent on worries that the U.S. economic recovery is stalling and that the debt plan may even undermine it by weakening demand in the next year or two.

Speaking in the White House Rose Garden after the Senate vote, Obama called the initial round of spending cuts in the package "an important first step" in forcing the government to live within its means.

"This compromise requires that both parties work together on a larger plan to cut the deficit," he added. "And since you can't close the deficit with just spending cuts, we'll need a balanced approach where everything is on the table."

The president stressed that the debt-reduction package avoids "cutting too abruptly while the economy is still fragile." And he vowed to pivot rapidly to deal with a jobless rate stuck stubbornly above 9 percent.

He urged Congress to take "bipartisan, common-sense steps" after its August recess to boost job creation and spur economic growth, including permanently extending the George W. Bush-era tax cuts for middle-class families, which are set to expire next year.

He called for patent reform, the passage of trade deals with Asian and Latin American countries, and the creation of an "infrastructure bank" to fund federal projects and put construction workers back on the job.

Although Obama has urged that the new legislative committee consider the range of options for shrinking the national debt, it's far from clear that everything will be on the table when the panel, composed of six lawmakers from each party, begins looking for further savings.

In an interview, Senate Majority Leader Harry Reid, D-Nev., said that he would like to "put people on it who are willing to do entitlement cuts . . . people with open minds." But the GOP's uncompromising stand against tax increases "makes it pretty hard for me."

House Budget Committee Chairman Paul Ryan, R-Wis., argued that Democrats "have already got their tax increases," including fresh revenue buried in last year's health-care overhaul. Ryan said he assumes that Obama and congressional Democrats will make good on their pledge to let the tax cuts that benefit high-income households expire on schedule.

"So, their tax increases are coming," he said. He said the new committee "could do a loophole closer here or there. But there's no way you're going to have significant revenues in the picture."

The debt-limit agreement directs the new committee to identify at least $1.2 trillion in additional savings over the next decade.

If the panel does not produce a plan by the end of November, or if Congress does not adopt it by the end of the year, more than $100 billion a year would be cut automatically from the budget, starting in January 2013.

Those reductions would be split evenly between defense and non-defense programs, although many Democratic priorities, such as Medicaid and Social Security, would be exempted.

The Pentagon, meanwhile, would take a $54 billion hit in the first year alone.

Democrats said the threat of such large automatic defense cuts would give them powerful leverage to renew their demand that Republicans consider tax increases for corporations and the wealthy as part of the solution to the nation's budget problems.

"Republicans are going to have to decide whether it's more important to protect special-interest tax breaks or whether it's more important to protect the national security of the United States," said Rep. Chris Van Hollen, D-Md

In an interview, Senate Minority Leader Mitch McConnell, R-Ky., agreed that the trigger is "really catastrophic," and that the consequences of not coming up with a bipartisan debt-reduction plan would be "unacceptable." Referring to the new committee, McConnell said, "We all view this as a real deal."

But Sen. Jon Kyl of Arizona, the No. 2 Republican in the Senate, who is widely viewed as one of McConnell's likely picks to serve on the panel, called the fate of the tax issue uncertain. "What remains to be seen is whether any discussion of taxes is appropriate," Kyl said. "I think it's pretty unlikely."

The Associated Press contributed to this article.

Invade Canada to fix that National Debt Problem?

Source

Arm yourselves, Canadians

John Kass

August 3, 2011

Proving once again that he is the undisputed master of American politics, President Barack Obama claimed another victory this week.

It was victory over an otherwise implacable foe:

Reality.

Obama may have fed the multitudes at his 2008 inauguration with two Filet-O-Fish sandwiches and five hot dog buns, but his absolute thrashing of reality this week was truly astounding.

Obama and his Democrats were able to increase the federal debt ceiling by $2.4 trillion — money that we don't have — and then give taxpayers a lecture about fiscal responsibility and how a tax increase will create more jobs. And if that's not grabbing reality by the hair and kicking it in the behind, I don't know what is.

And Republicans who voted to increase the debt ceiling said it allowed for trillions of dollars in federal cuts. But only in Washington is a promise to reduce a future spending increase a cut. It's not really a cut. It's still a whopping spending increase.

Sure, Obama's poll numbers are down. But is there outrage at the evisceration of the American economy? Not really.

If you really want to see American outrage, just cancel "Dancing With the Stars" or "American Idol."

But Washington's behavior has upset some world leaders. One is the Russian dictator (I meant Prime Minister) Vladimir Putin, who called us a bunch of parasites.

"They are living beyond their means," cried Putin to a group of adoring, youthful followers who hadn't even been born when the Soviet Union ran out of money and stopped governing and turned things over to its mafia.

"They are living like parasites off the global economy and their monopoly of the dollar," Putin said.

Clearly, things are bad when a brute like Putin can call us parasites and say that Washington's fantasy is unsustainable. What's worse is that he's right. The fantasy is unsustainable.

We're going bankrupt, and still our politicians cling to their fevered dreams. If you dare argue with them, Vice President Joe Biden might denounce you as a terrorist as he denounced the tea party, according to Politico.

So, if we're going to be realistic about things, we should acknowledge two key facts:

Our Washington politicians will never change their ways. And we're quickly running out of money and resources and the national will to do anything about it. So there's only one solution:

Attack Canada.

Yes, let's attack Canada now, before it's too late.

OK, so we tried it before, in 1812, and failed. But now, it's time to consider it again.

Some of you who live in Washington will probably accuse me of being somewhat unrealistic. Biden might get angry. But all I'd say is, consider the source.

And for the rest of you who don't live in Washington, just think on it a piece. When you look at this thing from all sides, attacking Canada is about the only recourse left to us.

America needs cash, and Canada is a nation rich with oil, gold, minerals and maple syrup. Oh, and don't forget all that fresh water from the Great Lakes that we can sell to Mexico once we get the pipeline up and running.

And Canada has that "health care" that Obama's always lusted after.

But that's not all. The country is teeming with fish, including the succulent walleye. Better yet, Canada is not teeming with people. Most of them live within a few miles of the border, so a quick strike and they're all ours.

And once we've conquered them, we won't be foolish enough to make them a state. We'll maintain them as a protectorate and just take their natural resources. And send all our undesirables to Newfoundland.

Before anyone gets upset, let me say here that the Canadians are a fine people, plucky, and they're possessed of that special brand of British stoicism and understatement that makes for excellent sarcasm.

And many Canadians are still prone to wearing tweeds in Toronto and Ottawa.

But they also have Celine Dion and put gravy on their fries.

How do I know their vulnerabilities? I'm half-Canadian myself and still have family there.

My mom was born in Guelph, Ontario, and she taught us to sing "God Save the Queen," which ensured that back home in Chicago, the Fitzgibbons boys on Peoria Street would give us a good beating.

So I called my Uncle Bill up in Mississauga, Ontario, to let him know my plans.

"What about Quebec?" he asked. "Are you going to conquer Quebec too?"

I thought we'd give Quebec back to France, as long as they let us keep all the fish and sell their fresh water to desert peoples for profit.

Just then, Obama was on TV, saying that now that we can borrow trillions more, it's not over. He said something about how "everyone's going to have to chip in; that's only fair," which, to my untrained ear, means he wants more money.

"So voters may have chosen divided government," said our president, "but they sure didn't vote for dysfunctional government."

Sadly, Obama forgot to mention that voters also wanted realistic politicians and a federal government that is grounded in reality.

So get ready, my Canadian friends. Gird yourselves. Winter is coming.

jskass@tribune.com

While Congress may have suckered most Americans into thinking they are cutting spending, foreigners know that ain't so.

"China’s ruling party said that “debt problems remain unresolved” and have been “merely pushed off.” Russian Prime Minister Vladi­mir Putin said that the United States is a “parasite” that is “living in debt.”"

"promises by political leaders that they would address the dangers posed by ballooning debt only raised expectations that were not met"

"Moody’s said it would cut the top-notch rating if lawmakers don’t follow through with their promises to bring spending in line with revenues" [Which the lawmakers probably won't do]

Source

Debt deal fails to soothe foreign critics

By Zachary A. Goldfarb, Published: August 2

After President Obama and Congress agreed to a deal over the federal debt ceiling this weekend, Treasury Secretary Timothy F. Geithner called the heads of big companies and banks to get their views on the agreement. They told him it would soothe the markets, and that the greatest dangers to the global economy lay far from U.S. shores.

But the countries that have lent the United States trillions of dollars had a sharply different opinion, reacting to news of the deal — which calls for cutting the national debt by at least $2.1 trillion over a decade — with skepticism, if not outright disdain. The newspaper of China’s ruling party said that “debt problems remain unresolved” and have been “merely pushed off.” Russian Prime Minister Vladi­mir Putin said that the United States is a “parasite” that is “living in debt.”

Explore the Senate vote on the bill to raise the debt ceiling.

The head of China’s central bank welcomed the deal to raise the limit but urged Washington to avoid further steps that might hurt investors. “Large fluctuations and uncertainties in this market would undermine the stability of the international financial system and hinder global recovery,” Zhou Xiaochuan said in a statement posted on the central bank’s website.

Despite immediate relief in Washington that a government default had been averted, America’s creditors remain concerned that the political breakthrough did not translate into the far-reaching steps the United States needs to take to restore its financial health.

The agreement fell short even of the goals set by members of both U.S. political parties, who had said the government needs to find at least $4 trillion in savings to bring the national debt under control. Recent promises by political leaders that they would address the dangers posed by ballooning debt only raised expectations that were not met.

The lack of enthusiasm among investors for the deal was reflected in the U.S. markets. Stocks on Tuesday had their worst day in nearly a year, wiping out the gains made so far in 2011. Amid mounting fears that the U.S. economy could be slipping back into recession, both the Dow Jones Industrial Average and the Standard & Poor’s 500 indexes were down more than 2 percent.

The debt agreement, which won final passage in Congress on Tuesday and was signed by Obama, offers few measures to invigorate the anemic economic recovery.

Nor has the deal allayed all the concerns of credit-rating companies, which have threatened to downgrade the United States if the national debt is not brought to heel — echoing similar warnings made to Greece and other European countries facing debt crises.

“While the agreement is clearly a step in the right direction, the United States, as in much of Europe, must also confront tough choices on tax and spending against a weak economic backdrop if the budget deficit and government debt is to be cut to safer levels over the medium term,” Fitch Ratings said Tuesday.

Meanwhile, Moody’s Investors Service said it had confirmed the government’s AAA rating but placed it on “negative,” indicating it could still downgrade. Moody’s said it would cut the top-notch rating if lawmakers don’t follow through with their promises to bring spending in line with revenues. The firm also said a downgrade could come if the U.S. economy stumbles or interest rates rise significantly on Treasury bonds.

Critical doubts

Foreign leaders are questioning whether Washington in the coming years will do more to tame the debt, or whether the creditors themselves will pay the price for U.S. indebtedness.

“The principal lesson that people are drawing around the world is that the American political system is deeply divided and will face serious difficulties in making choices in the coming decade,” said Jeffry Frieden, a government professor at Harvard. “People are asking the question, ‘Who’s going to bear the burden of the accumulated debt?’ Is it going to be the rich or the poor, or workers, or managers or creditors?”

As part of the debt agreement, Democrats were able to head off significant up-front changes to entitlement programs such as Medicare and Social Security, while Republicans blocked any immediate revenue increases. Both, however, could be recommended by a new committee of lawmakers that will produce a strategy later this year for further reductions in the debt.

“Putting public finances on a sustainable path will entail identifying further savings in entitlement spending as well as new revenues,” Christine Lagarde, managing director of the International Monetary Fund, said Tuesday.

An analysis by Barclays Capital on Tuesday said that the bipartisan deal, combined with weaker economic growth, would keep the national debt at 80 percent to 90 percent of the size of the total economy over the next decade. Economists say a national debt of that magnitude hurts business and reduces employment.

With the lifting of the debt ceiling, the Treasury Department will continue with routine auctions to raise new government funding. The department is planning to announce Wednesday how much it will raise in three-year, 10-year and 30-year bonds at auctions next week. On Monday, the Treasury said it would issue $331 billion from July through September.

So far, concerns about U.S. financial health have yet to be reflected in the market for U.S. Treasury bonds. While the government had to pay a little more than usual on Monday, the government continues to borrow money at extraordinarily low rates.

The dollar remains the global “reserve” currency, the basis for most transactions. Japan, with its limp economy, and Europe, with its multiple debt crises, offer no real alternative at the moment.

“There isn’t any place to go now but the U.S. dollar — not euros, not yen, not renminbi,” said Stephen Krasner, a Stanford University professor and former senior official at the State Department. “Despite all of what’s happened in the last months, there are no other alternatives.”

But this could change, and experts say the partisan wrangling over the debt could accelerate a move away from U.S. bond markets.

For several years, China, Russia and other emerging markets have been advocating that the dollar relinquish its primacy in global markets. A survey this summer by the Swiss bank UBS showed for the first that a majority of central banks believe the dollar will lose its status within 25 years.

“I would expect that process to, if anything, accelerate now,” Barry Eichengreen, a professor of economics and political science at the University of California at Berkeley, said in an e-mail. “What foreigners saw was narrow self-interest trumping all concern that the U.S. had a responsibility to stand by its debt obligations.”

Leaders in China and Russia who criticize the U.S. fiscal situation are often responding to domestic public opinion. (In China, a book about Chinese ownership of Treasury bonds, called “Currency Wars,” has been a bestseller.)

But even more moderate voices are acknowledging the trend. Lagarde, the IMF managing director, told CNN over the weekend that “there was a positive bias towards the USA, towards Treasury bills,” but “the current crisis is probably chipping into that very positive bias.”

Source

Public is disappointed in debt deal, poll says

9 comments by Susan Page - Aug. 4, 2011 12:00 AM USA Today

WASHINGTON - The hard-won, last-minute agreement to raise the debt ceiling and cut the deficit gets low ratings from Americans, who by more than 2-1 predict it will make the nation's fragile economy worse rather than better.

In a USA Today/Gallup Poll taken hours after the Senate passed and President Barack Obama signed the deal, 46 percent disapproved of the agreement; 39 percent approved. Only one in five saw it as a step forward in addressing the federal debt.

The dyspeptic view may reflect less an assessment of the plan's particulars than dismay at the edge-of-a-cliff negotiations to reach it.

"Most people assume that whatever came out of this horrible process was pretty crappy," said Joseph White, a political scientist at Case Western Reserve University in Cleveland who studies budget policy.

The poll indicated some paradoxes.

- Although ''tea party" conservatives succeeded in setting the parameters of the deal, supporters of the tea party were among those most unhappy with the outcome: 22 percent of tea-party supporters approved of the agreement, compared with 26 percent of Republicans and 58 percent of Democrats.

- Although Obama and congressional Democrats failed in their efforts to include higher taxes on the wealthy in the plan, Democrats were among those who rated it most highly. Two-thirds of moderate Democrats and six in 10 liberal Democrats approved of the deal.

- None of the policymakers involved got high ratings for their role, although Obama's standing was the least bad: 41 percent approval and 49 percent disapproval.

The congressional leaders - House Speaker John Boehner, R-Ohio, and Senate Majority Leader Harry Reid, D-Nev. - fared worse, with approval ratings that trailed disapproval by about 20 percentage points. The tea-party members of Congress scored a bit better than that: 33 percent of those polled approved of they way they handled the negotiations; 49 percent disapproved.

In the survey, 41 percent said the deal will make the economy worse; 17 percent said it will make it better. A third predicted it won't have much effect.

The agreement raised the debt ceiling by $2.4 trillion hours before the Treasury Department said the nation would default.

The poll of 1,012 adults, taken Tuesday, had a margin of error of plus or minus 4 percentage points.

Source

China warns U.S. on managing its debt

By Kathy Chu, USA TODAY

HONG KONG — China's central bank governor called Wednesday for the U.S. to "take responsible policy measures to handle its debt," a day after the world's largest economy reached a bipartisan deal to reduce its deficit and lift its borrowing limit to avoid a default.

The comments from People's Bank of China Governor Zhou Xiaochuan, posted on the central bank's website, signal China's lingering concern over America's financial health. China is the U.S.' largest foreign creditor, holding at least $1.16 trillion in Treasury securities.

Zhou also warned that stability is needed in the highly traded U.S. debt market, and said China plans to continue diversifying its currency reserves.

"Large fluctuations and uncertainties in (the Treasury) market would undermine the stability of the international financial system and hinder global recovery," he said.

China isn't the only one concerned with the U.S.' financial condition.

Analysts, investors and even ratings agencies question whether the deal reached by lawmakers is aggressive enough to begin to clean up the nation's debt-laden balance sheet and improve its financial condition. The deal raises the debt ceiling by $2 trillion and reduces the deficit by $2.5 trillion over 10 years.

"Concerns about the growth and the health of the U.S. economy are overshadowing the (debt) deal," says Katrina Ell, a Sydney-based associate economist for Moody's Analytics.

A raft of weak economic news is fueling those concerns: The U.S.' gross domestic product expanded by a bare 1.3% annual rate in the second quarter. U.S. manufacturing activity grew less than expected in July. And U.S. consumers cut spending for the first time in almost two years in June.

Asian central banks are especially concerned about the U.S.' financial health because they're the largest foreign holders of U.S. debt. Japan is the second-largest foreign holder of Treasuries, with $912.4 billion. Hong Kong holds $121.9 billion.

Japan's central bank wasn't available for comment Wednesday due to a quiet period before its monetary policy meeting this week.

The Hong Kong Monetary Authority said that it's "closely monitoring" the U.S. debt agreement, and meanwhile, managing its currency reserves in a "careful and prudent manner."

By raising the $14.3 trillion debt ceiling, the U.S. avoids a default on its debt obligations. But that doesn't mean it will escape a downgrade in its credit rating.

Already, Dagong Global Credit Rating, a Chinese ratings firm, downgraded the U.S.' rating Wednesday, noting that the nation's debt is growing faster than its economy.

The downgrade by the little-known firm is having little impact on Asian markets or on investor confidence, however, says Peter Lai, a Hong Kong-based director at DBS Vickers securities firm.

The three major U.S. ratings firms are still reviewing the U.S. credit rating. If one of them does downgrade U.S. debt, it's unlikely to spark a dramatic sell-off in the dollar, says Barclays' Asia currency strategist Nick Verdi.

"Given the state of the U.S. dollar as the world's reserve currency, where do investors put their money?" Verdi asks.

It's about their "job security", not the security of the American public!

Currently the American Empire spends more on our military then all the other countries of the world combined spend on their military.

Even if I was a flag waving love my government socialist I find it hard to believe that any cuts in the military would effect the security of American citizens. Well except the job security of a bunch of overpaid generals, admirals and other Pentagon bureaucrats.

Of course I find it hard to believe that our Congressmen and Senators will cut off the special interest groups in the military. I suspect they get more campaign contributions from the military then any other special interest group. And thus it is highly likely that they will continue to shovel pork to the military.

Source

Pentagon says projected spending cuts could undermine security

By David S. Cloud, Washington Bureau

August 4, 2011, 5:14 p.m.

Reporting from Washington— Senior Pentagon officials sought Wednesday to head off additional reductions in defense spending in coming months, warning that thousands of Defense Department employees might have to be furloughed or laid off and that across-the-board cuts in military programs would jeopardize national security.

A day after President Obama signed a debt reduction bill that requires as much as $400 billion in Pentagon spending reduction over the next decade, Defense Secretary Leon E. Panetta and other senior officials contended that Congress should look elsewhere in the federal budget for additional savings or raise taxes, rather than cut defense spending further.

Panetta called the possibility of automatic cuts totaling an additional half a trillion dollars "completely unacceptable" in a message to Defense Department employees released Wednesday.

The dire scenario outlined by Pentagon officials highlighted the political and fiscal roadblocks ahead for the "super-committee" to be created from members of the House and Senate as it seeks to carry out the law's requirement to find more than a trillion dollars in additional deficit reduction.

The $400 billion in future spending cuts already agreed to are "in line with what this department's civilian and military leaders were anticipating, and I believe we can implement these reductions while maintaining the excellence of our military," Panetta said. But the automatic cuts could do "real damage," he said.

By opposing cuts beyond the $400 billion, Pentagon officials were seeking to wall off a major chunk of the discretionary budget and to rally supporters in Congress from both parties. With troops deployed in both Afghanistan and Iraq over the last decade, the Defense Department's allies have kept its budget growing despite the nation's fiscal woes.

It is not clear, though, whether the Pentagon can turn back the current pressure for deeper cuts in its budget, even with the bipartisan backing the military budget normally receives, said Gordon Adams, who oversaw the defense budget at the Office of Management and Budget during the Clinton administration and is now a professor at American University.

With U.S. military involvement in Iraq ending and public support for the decade-old war in Afghanistan waning, defense spending will come down substantially over the next decade, whether or not the automatic cuts kick in, he said. He took issue with claims that cuts even of that magnitude would leave the country vulnerable.

"Properly done, we will end up with a Defense Department budget that is a trillion dollars down and still be a very capable force," he said.

Pentagon officials are especially worried that they could be forced to make automatic cuts of $500 billion to $600 billion in defense by 2021, which the debt reduction bill requires if Congress fails to enact additional deficit reduction legislation by the end of the year.

A senior Defense official who briefed reporters at the Pentagon said the automatic cuts would kick in next spring, requiring an immediate reduction of $50 billion to $60 billion in the base defense budget, which is $553 billion for fiscal year 2012. Similar reduction would be required every year until 2021, totaling about $500 to $600 billion, unless Congress decided to overturn the cuts.

Along with the $400 billion in cuts already approved, about $1 trillion would be slashed from planned defense spending levels in the next decade, if the automatic cuts take effect, the official said. That amounts to roughly a 20% reduction in defense, he said.

The cost of the war in Afghanistan and overseas military operations in Iraq and elsewhere, which is about $160 billion a year, would be exempt, and Obama has authority not to cut military salaries and other personnel costs.

Even so, the cuts, coming in the middle of the fiscal year, would be spread across many of the Pentagon's budget accounts and would have "very far-reaching effects," the official said, requiring furloughs, layoffs and reductions in procurement and training budgets.

He urged lawmakers to focus on entitlement programs, which include Social Security and Medicare, or to raise taxes, rather than slash military programs more. "I would hope they would not make further cuts in defense, because we have taken a lot already. It remains a dangerous world."

david.cloud@latimes.com

It ain't about good government, it's about I want my share of government pork!

"The health-care industry is one of the most powerful lobbies in Washington, spending nearly $300 million to influence Congress and the administration in the first half of 2011"

"The hospital sector alone ... has given nearly $50 million in campaign contributions to federal candidates since the 2008 election"

"Lockheed Martin, Boeing and other major contractors and trade groups have spent nearly $70 million on lobbying this year. The sector has also given about $50 million to candidates since 2008"

Source

Debt-limit deal triggers lobbying campaign from health-care and defense industries

By Dan Eggen, Published: August 3

Health-care and defense lobbyists are quickly gearing up for a major lobbying and public relations campaign in response to this week’s debt-limit deal, which could force hundreds of billions of dollars in cuts for two of Washington’s most powerful industries.

The compromise bill that averted a government default this week includes $1.2 trillion in mandatory cuts over the next decade if Congress can’t agree on a broader deficit reduction plan by December. Most of that amount targets the Pentagon and Medicare providers.

The arrangement has set off alarms among major defense contractors, hospital firms and others that would stand to lose billions if Congress doesn’t decide on a different plan. The first focus of the nascent lobbying campaign will be a bipartisan “supercommittee”to be named later this month that will attempt to hash out a compromise, according to lobbyists, trade groups and others involved in the effort.

The message from both industries will be similar: Any massive reductions will hurt national priorities and undermine job growth.

“It will be a full-court press to work with the committee to make our views known,” said Richard Pollack, executive vice president of the American Hospital Association, whose members would lose an estimated $50 billion a year in Medicare payments under the trigger scenario. “Our hospitals are in every congressional district in the country. Our patients are Republicans and Democrats. We are very concerned about where this is going to go.”

The architecture of the debt deal is aimed in part at forcing compromise by threatening two of Washington’s political sacred cows: Medicare for Democrats and defense spending for Republicans. The idea is that, faced with the possibility of draconian cuts, lawmakers will be swayed to find savings and revenue elsewhere to close the long-term budget gap.

The approach appears tailor-made to produce a frenzy on K Street, where major lobbying firms and trade groups are already laying out strategies for protecting their interests.

“It’s going to be pain versus pain for a lot of people,” said veteran lobbyist Tony Podesta of the Podesta Group, whose clients include major defense contractors and health-care firms. “There’s going to be a focus on the 12 and a focus on the leadership and a focus on the administration. Decisions will get made by a smaller number of people than you learned about in high school.”

The health-care industry is one of the most powerful lobbies in Washington, spending nearly $300 million to influence Congress and the administration in the first half of 2011, according to lobbying data from the Center for Responsive Politics. The hospital sector alone — which is particularly upset over the proposal to slash provider payments — has given nearly $50 million in campaign contributions to federal candidates since the 2008 election, records show.

On the defense side, Lockheed Martin, Boeing and other major contractors and trade groups have spent nearly $70 million on lobbying this year. The sector has also given about $50 million to candidates since 2008, according to the Center for Responsive Politics.

The deficit deal includes about $350 billion in guaranteed cuts for the Pentagon and other defense-related programs, plus up to $600 billion in additional reductions that will be triggered if Congress fails to reach a different agreement.

Marion C. Blakey, president of the Aerospace Industries Association, said in a statement this week that the deal “dangles a Sword of Damocles over our national security” if a compromise is not reached.

“The $600 billion in additional cuts to defense that are part of the so-called ‘trigger’ deal are a dangerous approach that could compromise our national security for decades to come,” Blakey said. “. . . National security funding should not be treated as a piggy bank for deficit reduction, while the real drivers of our fiscal problems, such as entitlement spending, are off the table.”

Ellen Miller, executive director of the Sunlight Foundation, which tracks money in politics, predicted that the deficit-reduction talks will produce a “lobbying-palooza” on Capitol Hill.

“Any bill that involves this kind of money, the companies with a vested interest are going to spend whatever it takes to protect their bottom lines,” she said.

The American Empire spends more on it's military then all the other countries of the world combined spend.

"U.S. defense spending has gone from about a third of total worldwide defense spending to 50 percent. In other words, we spend more on defense than the planet’s remaining countries put together"

Source

Why defense spending should be cut

By Fareed Zakaria, Published: August 3

The scary aspect of the debt deal meant to force all of Washington to its senses is the threatened cut to defense spending. If the congressional “super-committee” cannot agree on cutbacks of $1.5 trillion, the guillotine will fall and half of those cuts will have to come from expenditures on national security. As with so much Washington accounting, there is lots of ambiguity in baselines and terms (for instance, what is covered under “national security”?). Most experts estimate that the defense budget would lose $600 billion to $700 billion over the next 10 years. If so, let the guillotine fall. It would be a much-needed adjustment to an out-of-control military-industrial complex.

First, some history. The Pentagon’s budget has risen for 13 years, which is unprecedented. Between 2001 and 2009, overall spending on defense rose from $412 billion to $699 billion, a 70 percent increase, which is larger than in any comparable period since the Korean War. Including the supplementary spending on Iraq and Afghanistan, we spent $250 billion more than average U.S. defense expenditures during the Cold War — a time when the Soviet, Chinese and Eastern European militaries were arrayed against the United States and its allies. Over the past decade, when we had no serious national adversaries, U.S. defense spending has gone from about a third of total worldwide defense spending to 50 percent. In other words, we spend more on defense than the planet’s remaining countries put together.

It is not unprecedented for defense spending to fall substantially as we scale back or end military actions. After the Korean War, President Dwight Eisenhower cut defense spending 27 percent. Richard Nixon cut it 29 percent after Vietnam. As tensions declined in the 1980s, Ronald Reagan began scaling back his military spending, a process accelerated under Presidents George H.W. Bush and Bill Clinton. Given the enormous run-up in spending under George W. Bush, even if President Obama made comparable cuts to that of those presidents today, defense spending would remain substantially above the levels under all those presidents. The Bowles-Simpson commission’s plan proposed $750 billion in defense cuts over 10 years. Lawrence Korb, who worked at the Pentagon for Ronald Reagan, believes that a $1 trillion cut over 10 to 12 years is feasible without compromising national security.

Serious conservatives should examine the defense budget, which contains tons of evidence of liberalism run amok that they usually decry. Most talk of waste, fraud and abuse in government is vastly exaggerated; there simply isn’t enough money in discretionary spending. Most of the federal government’s spending is transfer payments and tax expenditures, which are — whatever their merits — highly efficient at funneling money to their beneficiaries. The exception is defense, a cradle-to-grave system of housing, subsidies, cost-plus procurement, early retirement and lifetime pension and health-care guarantees. There is so much overlap among the military services, so much duplication and so much waste that no one bothers to defend it anymore. Today, the U.S. defense establishment is the world’s largest socialist economy.

Defense budget cuts would also force a healthy rebalancing of American foreign policy. Since the Cold War, Congress has tended to fatten the Pentagon while starving foreign policy agencies. As former defense secretary Robert Gates pointed out, there are more members of military marching bands than make up the entire U.S. foreign service. Anyone who has ever watched American foreign policy on the ground has seen this imbalance play out. Top State Department officials seeking to negotiate vital matters arrive without aides and bedraggled after a 14-hour flight in coach. Their military counterparts whisk in on a fleet of planes, with dozens of aides and pots of money to dispense. The late Richard Holbrooke would laugh when media accounts described him as the “civilian counterpart” to Gen. David Petraeus, then head of U.S. Central Command. “He has many more planes than I have cellphones,” Holbrooke would say (and he had many cellphones).

The result is a warped American foreign policy, ready to conceive of problems in military terms and present a ready military solution. Describing precisely this phenomenon, Eisenhower remarked that to a man with a hammer, every problem looks like a nail. In his often-quoted farewell address, Eisenhower urged a balance between military and non-military spending. Unfortunately, it has become far more unbalanced in the decades since his speech.

comments@fareedzakaria.com

Debt rating of U.S. downgraded from AAA to AA by S&P

Does this mean the end is near? Or perhaps the system is starting to crumble?

A very interesting book on this subject is "The Creature from Jekyll Island", by G. Edward Griffin

Source

Debt rating of U.S. downgraded from AAA by S&P

Aug. 5, 2011 08:05 PM

Associated Press

WASHINGTON - The United States has lost its sterling credit rating.

Credit rating agency Standard & Poor's on Friday lowered the nation's AAA rating for the first time since granting it in 1917. The move came less than a week after a gridlocked Congress finally agreed to spending cuts that would reduce the debt by more than $2 trillion -- a tumultuous process that contributed to convulsions in financial markets. The promised cuts were not enough to satisfy S&P.

The drop in the rating by one notch to AA-plus was telegraphed as a possibility back in April. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. Moody's said it was keeping its AAA rating on the nation's debt, but that it might still lower it.

One of the biggest questions after the downgrade was what impact it would have on already nervous investors. While the downgrade was not a surprise, some selling is expected when stock trading resumes Monday morning. The Dow Jones industrial average fell 699 points this week, the biggest weekly point drop since October 2008.

"I think we will have a knee-jerk reaction on Monday," said Jack Ablin, chief investment officer at Harris Private Bank.

But any losses might be short-lived. The threat of a downgrade is likely already reflected in the plunge in stocks this week, said Harvey Neiman, a portfolio manager of the Neiman Large Cap Value Fund.

"The market's already been shaken out," Neiman said. "It knew it was coming."

One fear in the market has been that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest rate paid on U.S. bonds, notes and bills would have to rise to attract buyers. And that could lead to higher borrowing rates for consumers, since the rates on mortgages and other loans are pegged to the yield on Treasury securities.

However, even without an AAA rating from S&P, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren't scared away this week. While stocks were plunging, investors were buying Treasurys and driving up their prices. The yield on the 10-year Treasury note, which falls when the price rises, fell to a low of 2.39 percent on Thursday from 2.75 percent Monday.

A study by JPMorgan Chase found that there has been a slight rise in rates when countries lost an AAA rating. In 1998, S&P lowered ratings for Belgium, Italy and Spain. A week later, their 10-year rates had barely moved.

The government fought the downgrade. Administration sources familiar with the discussions said the S&P analysis was fundamentally flawed. They spoke on condition of anonymity because they weren't authorized to discuss the matter publicly. S&P had sent the administration a draft document in the early afternoon Friday and the administration, after examining the numbers, challenged the analysis.

S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade, to AA, would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.

In its statement, S&P said that it had changed its view "of the difficulties of bridging the gulf between the political parties" over a credible deficit reduction plan.

S&P said it was now "pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics anytime soon."

The Federal Reserve and other U.S. regulators said in a joint statement that S&P's action should not have any impact on how banks and other financial institutions assess the riskiness of Treasurys or other securities guaranteed by the U.S. government. The statement was issued to make sure banks did not feel that the downgrade would affect the amount of capital that regulators require the banks to hold against possible losses.

Before leaving for a weekend at Camp David, President Barack Obama met with Treasury Secretary Timothy Geithner in the Oval Office late Friday afternoon.

The downgrade is likely to have little to no impact on how the United States finances its borrowing, through the sale of Treasury bonds, bills and notes. This week's buying proves that.

"Investors have voted and are saying the U.S. is going to pay them," said Mark Zandi, chief economist of Moody's Analytics. "U.S. Treasurys are still the gold standard." He noted that neither his parent organization, Moody's, nor Fitch, the other of the three major rating agencies, have downgraded U.S. debt.

Japan had its ratings cut a decade ago to AA, and it didn't have much lasting impact. The credit ratings of both Canada and Australia have also been downgraded over time, without much lasting damage.

"I don't think it's going to amount to a lot," said Peter Morici, a University of Maryland business economist.

Still, he said, "The United States deserves to have this happen," because of its clumsy handling of fiscal policy.

S&P downgrades U.S. credit rating from AAA

S&P downgrades U.S. credit rating from AAA

By Matt Krantz and Kathy Chu, USA TODAY

The U.S. lost its esteemed AAA credit rating after being downgraded by Standard & Poor's Friday, eroding the elite standing it has held in global markets for more than 70 years.

The nation's credit rating was cut to AA+ after S&P said the compromise made by Congress and President Obama this week to cut spending and boost the debt ceiling "falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics."

S&P's statement was blunt in its assessment.

"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process," the ratings firm said.

"We also believe that the fiscal consolidation plan that Congress and the administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade," S&P said.

Since April, S&P has repeatedly warned the U.S. rating was at risk if Washington did not agree to reduce deficit spending by $4 trillion over 10 years. This week's agreement would cut spending by about $900 billion and create a joint congressional committee to find $1.5 trillion more by Thanksgiving.

The U.S. Treasury tried to get S&P to reconsider its ratings downgrade Friday. Treasury officials pointed out that S&P's original analysis of the debt deal's $2 trillion in savings was flawed. The rating agency adjusted its analysis but still downgraded the U.S.' credit rating, according to a government official familiar with the matter. The source declined to be identified because he was not authorized to speak on the record. S&P couldn't immediately be reached for comment. Statement from the Fed

Earlier today, Standard & Poor's rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations). For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board's Regulation W, will also be unaffected.

In a statement, Treasury said, "A judgment flawed by a $2 trillion error speaks for itself."

The downgrade comes at a treacherous time for financial markets, which are already unnerved not only by mounting concerns about government debt and the economy in the U.S., but also in Europe.

The move could undermine confidence and "has the potential to pull the rug from under investors who are already on the edge," says Jack Ablin of Harris Private Bank.

Stock investors are already reeling from a vicious week and start to August. The S&P 500 index lost 7.2% during the week, making it the worst week since November 2008, when it lost 8.4%, says Howard Silverblatt of S&P. Investors watched as $1.2 trillion in paper wealth was erased during the downdraft, according to the Wilshire 5000 Total Market Index.

The downgrade will have a ripple effect around the world.

Asian central banks are the largest foreign holders of U.S. Treasury securities. China is the U.S.' largest foreign creditor, holding $1.16 trillion in Treasury securities, followed by Japan with $912.4 billion.

Dagong Global Credit Rating, a Chinese ratings firm, downgraded the U.S.' rating Wednesday, noting that the nation's debt is growing faster than its economy. But the downgrade by the little-known firm had little impact on markets last week.

Also Wednesday, China's central bank governor called on the U.S. to "take responsible policy measures to handle its debt," signaling China's lingering concern over America's financial health.

"Large fluctuations and uncertainties in (the Treasury) market would undermine the stability of the international financial system and hinder global recovery," says People's Bank of China Governor Zhou Xiaochuan, adding that China will continue diversifying its currency reserves.

The move to downgrade does come as a surprise, says Christian Cooper, head of U.S. dollar derivatives trading at Jefferies & Co.

"I think the market was broadly expecting a honeymoon period after the debt deal with at least some review period before being slapped with a scarlet letter from a rating agency. Risky assets will likely be hardest hit on Sunday night," he says.

Oddly enough, U.S. treasuries should trade well on renewed global weakness in equities, driving investors to alternatives considered less risky, he says.

Bond experts, such as Jeffrey Gundlach of DoubleLine Capital, have said Treasuries could likely benefit from a downgrade as investors sell the riskier parts of their portfolios.

In theory, a downgrade should cause investors to sell Treasuries and drive up the yield. But the threat of a downgrade has been looming for weeks, yet, the yield on the 10-year Treasury fell to 2.3% Friday, the lowest since October.

Yet, if the downgrade ultimately causes investors to demand higher yields that could send repercussions through the entire bond market, potentially driving up costs to consumers for everything from mortgages to credit card loans.

Treasury investors will likely take the downgrade in stride since they've expected S&P to take a hard line, says Mark Luschini, strategist at Janney Montgomery Scott. Other ratings agencies, Moody's and Fitch Ratings have reaffirmed their AAA ratings, he says. "It's interesting why S&P decided to stick its neck out with an outright downgrade," he says.

Bond investors will be unfazed, he says, because the economy is perceived to be shaky and even AA+ rated U.S. Treasuries are safer than most alternatives, he says. "If it was a healthier economic climate, maybe there would be a reaction in the bond market, as people would feel they had alternatives with other assets," he says.

Stock investors will likely take the news in stride, he says, as they await more data indicating the health of the economy, he says. "This doesn't help," he says. "But (stock) investors may be willing to hold their breath and look past the downgrade," as they await what the Federal Reserve says in its minutes due this week.

China demands U.S. 'live within its means'

China demands U.S. 'live within its means'

By David Pierson Los Angeles Times Staff Writer

August 6, 2011, 1:52 a.m.

Reporting from Beijing— China called on the United States to "cure its addiction to debts" and "learn to live within its means" in a searing commentary published Saturday by the official New China News Agency in response to Standard & Poor's historic downgrading of the U.S. government's credit rating a day earlier.

China, the largest foreign holder of U.S. federal debt, blamed "short-sighted political wrangling in Washington" for creating the current financial morass that now threatens to undermine the global economy.

"China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets," the commentary said.

"If no substantial cuts were made to the U.S. gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way," it continued.

China has regularly voiced concern about its dollar investments, most recently Wednesday when the governor of the country's central bank urged the U.S. to avoid a default and cut its deficit.

In addition to holding about $1.2 trillion in treasuries, an estimated two-thirds of China's $3.2 trillion in foreign exchange reserves is estimated to be in dollars.

Standard & Poor's downgrading was the first in U.S. history and echoed downgrades issued by a little-known Chinese credit rating agency that has been dismissed by some China watchers as politically motivated.

The Dagong Global Credit Rating Co. twice lowered its rating for the U.S., most recently Wednesday when it said defects in the U.S. political structure stood in the way of solving the country's debt problems.

"Dagong Global, a fledgling Chinese rating agency, degraded the U.S. treasury bonds late last year, yet its move was met then with a sense of arrogance and cynicism from some Western commentators" the New China News Agency's Saturday editorial said. "Now S&P has proved what its Chinese counterpart has done is nothing but telling the global investors the ugly truth."

Jin Canrong, dean of international relations at China's Renmin University, said Beijing is especially fearful of another global recession because leaders have exhausted stimulus measures to blunt the effects of the 2008 financial crisis.

"A second recession would be a nightmare for China," Jin said.

Massive credit expansion since 2008 has led to the country's highest rate of inflation in three years -- fueling a national property bubble and potentially sowing the seeds of social instability.

China's heavy reliance on U.S. debt and the dollar is largely self-induced because of its decision to shun market forces and control the value of its currency to keep Chinese exports competitively cheap.

China's central bank must jettison trillions of incoming foreign exchange to ensure the yuan remains low. For the most part, U.S. treasuries represent the only destination large enough to accommodate China's holdings. Officials have periodically pledged to diversify China's reserves, but few alternatives exist.

david.pierson@latimes.com

Standard & Poor’s is right this time?

Standard & Poor’s has been wrong before. But they’re right now.

By Ezra Klein

Standard Poor’s decision to downgrade the United States has led to a lot of criticism of Standard Poor’s. The White House called their performance, which included a miscalculation of about $2 trillion, “amateur hour.” Rep. Barney Frank was even less sparing. “These are some of the people who have the worst records of incompetence and irresponsibility around,” he told Rachel Maddow last night. They are trying to “justify their reputation.”

All of this is true. Standard Poor’s didn’t just miss the bubble. They helped cause it. They were paid by the banks to award their AAA-stamp of approval to all manner of financial products that were anything but riskless -- which, ironically, makes them an accessory to the resulting explosion of U.S. debt. You’ve heard the old joke about chutzpah being a young man who murders his parents and then pleads for leniency because he’s an orphan? S&P has chutzpah. All the credit-rating agencies do. It’s built into their business, which requires them to assess the stability of markets they helped crash. It’s long been my position that the credit-rating agency model is broken and, at times, dangerous, and investors need to pay less attention to their pronouncements and policy needs to do deemphasize their role in the syste,.

But that doesn’t make Standard Poor’s wrong in this particular case. “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges,” they explained in the statement accompanying Friday’s decision. After Republicans in Congress spent three months weighing whether or not to default on our debt and Senate Minority Leader Mitch McConnell said that paying our bills would never again be a foregone conclusion, can anyone really argue with that? After every Republican presidential candidate save Jon Huntsman either remained silent on, or flatly opposed, the deal to raise the debt ceiling, can anyone really say that U.S. debt is completely riskless? That there’s no chance of a political miscalculation, and if there is such a chance, that they can perfectly predict the outcome of the ensuing chaos?

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Dow plunges more than 600 points after downgrade

NEW YORK (AP) -- Stocks plunged Monday as anxiety overtook investors on the first trading day since Standard & Poor's downgraded American debt.

The Dow Jones industrials fell 634.76 points. It was the sixth worst point decline for the Dow in the last 112 years and the worst one-day drop since December 2008. Every stock in the Standard & Poor's 500 index declined Monday.

Investors worried about the slowing U.S. economy, escalating debt problems threatening Europe and the prospect that fear in the markets would reinforce itself, as it did during the financial crisis in the fall of 2008.

"`What's rocking the market is a growth scare," said Kathleen Gaffney, co-manager of the $20 billion Loomis Sayles bond fund. "The market is under a lot of stress that really has little to do with the downgrade." Instead, Gaffney said, investors are focused on "how Europe and the U.S. are going to work their way out of a high debt burden" if economic growth remains slow.

Investors desperately looked for safe places to put their money and settled on U.S. government debt -- even though it was the target of the downgrade Friday, when S&P removed the United States from its list of the lowest-risk countries.

The price of Treasurys rose sharply, and yields, which move in the opposite direction from price, fell. The yield on the 10-year Treasury note fell to 2.34 percent from 2.57 percent Friday. That matches its low for the year, reached last week.

"This is largely a flight to safety," said Thomas Simons, money market economist with Jefferies & Co. "The bond market is really trading off of what's going on in the stock market." Money flowed out of stocks and into Treasurys.

Gold set a record. It rose $61.40 to settle at $1,713.20.

Crude oil, natural gas and other commodities fell sharply on worries that a weaker global economy will mean less demand. Oil fell 6.4 percent to settle at $81.31 per barrel.

Fear is spreading quickly through the market, said Dimitre Genov, senior portfolio manager with Artio Global Investors. "It's becoming a vicious cycle and could feed into consumers reducing their demand as well."

The Dow was down 5.5 percent a 10,809.85. The sharp drop extended Wall Street's almost uninterrupted decline since late July, when the Dow was flirting with 13,000. It fell below 11,000 for the first time since November.

The S&P 500 fell 79.92, or 6.7 percent, to 1,119.49. The Nasdaq composite index fell 174.72, or 6.9 percent, to 2,357.69.

Stock markets in Asia began Monday's global rout. The main stock index fell almost 4 percent in South Korea and more than 2 percent in Japan. European markets opened later and fell, too, with Germany down 5 percent and France 4.7 percent.

In the U.S., stocks fell even as Moody's, another major credit rating agency, stood by its top rating of Aaa for the United States. It said it could downgrade the U.S. if it doesn't cut its deficit, "but it is early to conclude that such measures will not be forthcoming."

Financial markets also did not appear comforted by an afternoon statement by President Barack Obama, who said Washington needs more "common sense and compromise" to tame its debt.

"Markets will rise and fall," he said. "But this is the United States of America. No matter what some agency may say, we've always been and always will be a triple-A country."

S&P, in its downgrade, criticized dysfunction in the American political system. The downgrade wasn't a total surprise but came when investors were already feeling nervous about the U.S. economy and European debt, among other problems.

Last week, the Dow Jones industrial average fell almost 700 points. That was its biggest weekly point loss since October 2008, during the financial crisis. Counting Monday, the Dow has dropped in 10 of the last 12 trading days. It is down more than 1,900 points, or 15 percent, since July 21.

The Russell 2000 index of small stocks has now lost nearly 25 percent from its most recent high on April 29. A decline of 10 percent or more off recent highs is considered to be a correction. But a drop of 20 percent or more is said to be the start of a bear market.

The Nasdaq and S&P 500 are both down about 18 percent since the end of April. The Dow is down 16 percent.

The last bear market for the S&P 500 ran from October 2007 until March 2009. The index lost 57 percent of its value during the downturn.

S&P on Monday downgraded mortgage lenders Fannie Mae, Freddie Mac and other agencies linked to long-term U.S. debt. Fannie and Freddie own or guarantee about half of all U.S. mortgages. Their downgrade could eventually mean higher mortgage rates.

Worries about weaker profits that could result from a slowing economy have slammed the financial industry since late July. As a group, financial stocks in the S&P 500 index fell 10 percent on Monday to their lowest level since July 2009.

Bank of America plunged 20.3 percent, to $6.51, after AIG filed suit against the bank. The insurer alleged Bank of America sold it overvalued mortgage-backed securities. The bank denied the allegations. Its stock is down 51 percent this year, from $13.34.

Stocks in other industries whose profits are closely tied to the strength of the economy also fell sharply. Energy stocks in the S&P 500 fell 8.3 percent, for example.

The smallest losses came in safer industries such as consumer staples whose profits tend to be steadier, regardless of the economy. Even in a bad economy people will still buy things like toothpaste and bread.

The Vix index, a measure of fear among investors, shot up 47 percent to its highest level since May 2010. The index shows how worried investors are that the S&P 500 will drop over the next 30 days. It does this by measuring prices for stock options that investors can buy to help protect their portfolios.

Investors are also worried that Italy or Spain could become the next European countries to have trouble repaying its debts. Greece, Ireland and Portugal have already received bailout loans because of Europe's 21-month-old debt crisis.

The fears have pushed investors to shun Spanish and Italian bonds, which led to higher yields on the bonds. That resulted in even higher borrowing costs for the countries.

The European Central Bank stepped in Monday and bought bullions of euros worth of their bonds. The move helped to lower yields on Spanish and Italian bonds, at least temporarily.

Seeking to avert panic spreading across financial markets, the finance ministers and central bankers of the Group of 20 industrial and developing nations issued a joint statement Monday saying they were committed to taking all necessary measures to support financial stability and growth.

"We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets," they said.

Worries about the U.S. economic recovery have been building since the government said that economic growth was far weaker in the first half of 2011 than economists expected.

The economy grew at a 1.3 percent annual rate from April through June, below economists' expectations. It expanded at just a 0.4 percent rate in the first quarter. The first half of 2011 was the slowest since the end of the recession.

Then reports showed that the manufacturing and services industries barely grew in July. Job growth was better than economists expected last month. But the 117,000 jobs created in July were still well below the 215,000 that employers added in February, March and April, on average.

The Federal Reserve will meet on Tuesday, but economists don't expect much to come out of the meeting. The central bank's key interest rate is already at a record of nearly zero, where it has been since 2008.

The Fed has also already said that it plans to keep rates low for "an extended period." Chairman Ben Bernanke said last month that the Fed could step in to help the economy if it further weakened.

Fears about a weaker U.S. economy have overshadowed the profit growth that companies have reported for the second quarter. For the 441 companies in the S&P 500 that have already reported, earnings rose 12 percent in the second quarter from a year earlier. Revenue growth has also topped 10 percent for the first time in a year.

Verizon Communications Inc. fell 3.9 percent after it was unable to come to terms with 45,000 workers on health care costs, pensions and other issues.

More than 69 stocks fell for every one that rose on the New York Stock Exchange. Consolidated trading volume was heavy at 9.7 billion shares, nearly triple the volume in early July.

AP Business Writers Matthew Craft, David K. Randall and Daniel Wagner contributed to this report.

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