11A121 Reality Check by Jim Davies, 8/7/2011    

The credit rating company Standard & Poor's downgraded the United States Government on August 5th, so making history.

"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics," they announced. S&P dropped the ranking one level to AA+ from AAA.

Historians will in the coming zero government society no doubt discover how this organization managed to keep its top rating for so long, when to ordinary mortals it has very long been obvious that it's hopelessly broke. Meanwhile, S&P have felt obliged to acknowledge that its "medium term debt" is at risk of default. They said nothing about the long term; "Shut the door! - they're coming in the window!"

So far the Feds have maintained the illusion of solvency by "rolling over" the debt - when a T-Bill comes up for repayment, they just sell another one (or two) to replace it. After this S&P downgrading, that will be much harder; at the least, a higher rate of return must be offered, and at worst nobody will buy them at any price. That long-term bankrupt condition derives from two facts:

(a) By spending (on vote-catching schemes) for all of living memory more than it took in as taxes, the FedGov has accumulated a debt of $14 trillion, which cannot possibly be paid back for the whole GNP of the US economy happens to be that size and there is no way we can all do without food and warmth for a whole year while surrendering all we earn to pay it off. Similarly a plan to pay it off over, say, ten years would fail for a similar reason: it would require a massive tax hike (or "benefit" loss) up with which voters will simply not put. Counting interest at only 3% a year, by my reckoning a 10-year payoff would require extra taxes of $1.65 trillion a year and a 20-year period, just under $1 tillion. Since the Feds take in $1 trillion by their alleged income tax, the latter case would mean doubling that item. It cannot be done; not only will voters refuse to pay, they will find ways to avoid payment; by Arthur Laffer's theory, his "Curve" showed that there is a rate of total tax (about 50% of all that's earned) which produces more than any other rate; raise it, and the total money collected goes down, not up. Therefore government is hoist on its own petard; that is, the long-taught fiction that by allowing it to exist, something can be obtained for nothing.

(b) More fundamentally, no government can ever pay any debts without first stealing the money to do so. None of them have any resources of their own whatever; their only asset is the "power to tax" - and even that is limited as in (a). Now, that doesn't stop them stealing - taxing and spending and getting re-elected - but it does mean that the ordinary rules of conduct which S&P assume for all other kinds of entity - companies and individuals - simply cannot apply. The ethical dimension is always missing. Government cannot ever be trusted to honor its debts because it is in its core, essential nature a criminal organization. I have no idea why such a rating agency would treat any government in the same manner as, say, Microsoft.

There are two ways to fix this. One, the FedGov can declare bankruptcy - default - and go out of business, just like an honest company would. That is the morally correct way and, while it would cause enormous disruption wordwide, the chaos would be brief. Since this is the proper solution, we can be confident they will not choose it.

The other way is what they will choose, and that is to default over a longer period without any announcement or confession, sneakily cheating their creditors by flooding the world with bogus "dollars" so as to repay in currency that will purchase progressively less, in a long-term period of high inflation. This is our future, until the happy day when we terminate their existence by withdrawing all our labor.

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