Ponder U.S. Pride: Credit Rating Down, Competitive Ranking Down, Debt/Deficit Up, Cities in Bankrupt…Impact on Business…

The U.S. credit has never defaulted on debt, but with partisan acrimony running at fever pitch– is the unthinkable suddenly thinkable… are we in a game of chicken with no winner; ponder the consequence.

Is the U.S. in decline? Prior to the financial crisis, the majority of people around the world viewed U.S. as the leading economic power, according to survey by Pew Research Center, in 2008. How times have changed: The financial crisis and subsequent recession vastly altered those perceptions. The U.S. is no longer viewed as having a cloak of invincibility.

According to 26,000 people interviewed in 21 countries by Pew Research Center; U.S. is no longer looked upon as world’s leading economic power or only superpower or major global competitor or country to emulate… Let’s take a closer look, for example: Top 10 least-risky countries for investment, June 2012, are; Norway, Switzerland, Singapore, Luxembourg, Sweden, Finland, Canada, Denmark, Netherlands, and Germany: U.S. is ranked at number 13.

Also, U.S. students continue to trail behind other nations; out of 34 countries, U.S. ranked 14th in reading, 17th in science and 25th in math. Also, the U.S. has the highest health care spending in the world– equivalent to 17.9% of its gross domestic product (GDP) or $8,362 per person. However, several population surveys show that the U.S.’s extra spending is probably not buying better health care, with the exception of shorter waits for non-urgent surgery.

Earlier studies have shown the U.S. to be in the bottom quartile of population health care indicators, such as; life expectancy and infant mortality… In addition, U.S. Treasury says, total foreign financial holdings of U.S. debt rose 0.7% in July to a record $5.35 trillion. China, largest foreign holder of Treasury debt, boosted holdings to $1.15 trillion, up 0.2% from June. Japan, second-largest buyer of Treasury debt, increased holdings 0.6% to $1.12 trillion…

Also, U.S.’s ability to compete on global stage has fallen for ‘fourth year running’according to an annual survey by World Economic Forum. This survey says; the world competitive ranking for the U.S. dropped two positions to ‘seventh’ place, this year; as the Netherlands and Germany moved ahead of the U.S. The report said; some aspects of the U.S. political environment continues to raise concern among business leaders; particularly, low public trust in politicians and perceived lack of government efficiency

On Aug. 2, 2011, Standard & Poor’s Ratings Services (S&P) lowered long-term sovereign credit rating on the U.S. from ‘AAA’ to ‘AA+’. S&P’s said that outlook on U.S. long-term credit rating is negative. At the same time, S&P’s affirmed ‘A-1+’ short-term credit rating on the U.S. According to S&P; they lowered long-term credit rating on U.S. because they believed that prolonged political controversy over raising statutory debt ceiling, related fiscal policy debate indicated that any near-term progress on containing growth on public spending or on reaching agreement for raising revenues is less likely than previously assumed and that the issue will remain a contentious and fitful process.

However, even though none of ‘big three’ credit rating companies (S&P, Moody, Fitch) have taken any downgrade action since S&P’s August 2, 2011 downgrade from AAA to AA+; the Egan-Jones Rating Company downgraded U.S. credit rating twice further in 2012. After its initial rating cut on July 16, 2011 from AAA to AA+, Egan-Jones cut its credit rating a second time on April 5, 2012 from AA+ to AA, saying; because of lack of tangible progress on addressing the problems and continued rise in debt-to-GDP. On September 14, 2012, Egan-Jones cut its credit rating, again, for third time from AA to AA-, as a reaction to the Fed’s QE3; this credit rating is the lowest of what is considered as ‘high grade’.

But S&P, on June 8, 2012, said it’s keeping credit rating of U.S. long-term debt at AA+. Stating that U.S.’s credit remains blemished, and reiterated its assessment that the U.S.’s political leaders are not seriously addressing federal debt burden issues, saying; we believe that political polarization between parties has increased in recent years, which is making resolution more difficult…

A credit rating evaluates credit worthiness of a debtor, especially a business (company) or a government. It is an evaluation made by a credit rating agency of the debtor’s ability to pay back the debt and the likelihood of default. The credit rating represents an evaluation of qualitative and quantitative data for companies, governments… which includes non-public information. S&P’s credit rating scale from excellent to poor is: AAA, AA+, AA, AA-, A+, A, A-, BBB+… Currently, U.S. has ‘AA+’ credit rating from the ‘big three’…

In the article Moody’s Credit Rating and Government Spending by Jason Hughey writes: Moody’s Investors Service (Moody) said that unless U.S. Congress gets its fiscal act together, U.S. would likely face another potential downgrade on its debt sometime next year. How should we understand Moody’s warning? Consider: Since 2008 recession, any ‘recovery’ that been seen is due to artificially propped up ‘stimulus’ efforts and cheap credit that have misdirected resources and encouraged mal-investments. Thus, not only is the recovery floundering but most of it isn’t even real economic recovery.

Meanwhile, U.S. government has continued its opiate-like addiction to higher spending as if it can serve as a cure-all panacea to the economy’s woes. In reality, such high levels of unaffordable spending have yielded a massive debt crisis that now has U. S. on brink of another credit rating downgrade. No one party or president is at fault for this spending crisis. Since 1980, regardless of which political party controlled Congress or the presidency, the U.S. has consistently increased its debt limit.

Usually, the pace of debt accumulation is faster when the House, Senate, and presidency are all controlled by the same party, regardless of whether that party is symbolized by donkey or elephant. As U.S. continues to barrel in direction of the fiscal cliff, it’s essential to remember that politicizing the issue of how to fix the economy will more likely obfuscate things rather than help people understand one of the causes: outrageous and irresponsible government spending. But possibly, the combination of the fiscal cliff/debt crisis and Moody threat of downgrade will serve as a reminder of the disastrous things that centralized, big spending government can do when it refuses to curb spending…

In the article Why U.S. Cities Go Bankrupt by Fareed Zakaria writes: I was struck to hear that city of San Bernardino, CA is declaring bankruptcy. It follows similar moves in past month by Mammoth Lakes and Stockton, CA. Before them it was Harrisburg, PA, Jefferson County, AL, Central Falls, RI– the list continues. What is going on? Companies go bankrupt all the time, but what happens when a city goes under? In reality, the two aren’t that different.

Companies file for what’s known as Chapter 11, which enables them to renegotiate deals, downsize… Also, filing Chapter 11 gives the option of liquidating, or breaking up company. But, these options are essentially impossible for a city, plus it’s unconstitutional.

Cities must file a Chapter 9, which covers municipalities: that’s cities, towns, villages, taxing districts and utilities; 641 cases of municipal bankruptcy have been filed since Chapter 9 was created. At its heart, the city bankruptcies you hear about these days aren’t about taxes being too low or spending on city services being too high– they’re about pensions. California’s pension-related costs rose 20-fold in the decade since 1999. This frightening trend is true almost everywhere in the U.S. and it’s not sustainable.

A Pew research survey found that the gap between state assets and their obligations for public sector retirement benefits is $1.38 trillion. It rose by 9% in 2010 alone– and it will likely keep rising until the obligations are renegotiated. The truth is the U.S. is sacrificing its future to pay for its past. To keep up with burgeoning pensions, states and cities are slashing services.

For decades, local governments have doled out patronage by increasing pension benefits– these costs impact budgets, years later, when officials who gave benefits are safely retired themselves. We now have to reckon with those choices. I’m not saying that bankruptcy is a good thing. But, it’s a mechanism that allows for an  emergency and for renegotiating deals that are; simply, bankrupting the country...

In the article U.S. Credit Downgrade: Its Impact on Small Businesses by Rohit Arora writes:What does all this mean for small business owners already concerned by slow, no growth economy? They key effects of the federal credit downgrade for small business are:

  • The U.S. government’s leverage to pump up the economy has gone down further: That means cuts in federal spending along with increases in taxation are going to come a lot sooner. This will lead to even more weakening of the growth in the U.S. economy, in the short to medium term; and increasing business and personal tax rates for small business owners will not help. Cuts in government spending will affect innovation even more, in short to medium term, and cause a slowdown in innovation in the economy. Small business has led the U.S. out of every recession after the Great Depression, until now. Coupled with increased globalization and job growth; overall demand in the economy will be anemic and lead to stagnation in the economy.
  • Interest rates will go up in near future as cost of borrowing money in U.S. will rise: Lack of credit access coupled with higher interest rates will raise cost of capital for small business, both further hurting their bottom line and slowing job growth even more. The dollar will fall, thereby raising costs of imports, including; gasoline… Coupled with weak real estate prices, small business should be braced for tough times.

However, everything is not gloom and doom, as a weaker dollar and lower costs can make small business more competitive. Small business, when run efficiently, can become big export engines, as Germany has shown. The key issue is whether small business will get enough incentives and support, including; seller financing to boost exports…

Also, small business must be more efficient; cash flow, cost conscious, and operate in an economic environment that will see very low growth over the next three to five years. The S&P credit downgrade should be a wakeup call for U.S. policymakers and business owners. It may indeed act as best stimulant for the economy, overall. Otherwise, the U.S. is set on a path of declining power, much like the U.K. in the post-World-War-II era…

Pew study finds, California has the nation’s worst credit rating of any state, now… and, the nation’s worst credit rating record over past 11 years, according to a new nationwide compilation by the Pew Center on the States. Four states – Missouri, North Carolina, Virginia and Utah – have held AAA credit ratings for 46 years or more, Pew noted.