Debt Ceiling Chicken

This is from Dave Ramsey this morning, whom I have to pimp since he's a fellow Brentwood-ian and I may try to get a job there soon.

‎If the US Government was a family, they would be making $58,000 a year, they spend $75,000 a year, & are $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget & debt, reduced to a level that we can understand.
Why would we need to import goods that can be built cheaper here?

For the most part, they can't. Manufactured goods have three basic components: materials, labor, transportation, and energy. The Chinese labor is so vastly cheaper than ours that we simply can't make goods as cheaply as they can until you get into things that require skill levels or knowledge that they don't have. In areas where they can field workers that can make a good, their cost advantage in labor is enormous.

We probably have a quality advantage, but that's usually a temporary one; the smart low quality, high volume manufacturer will use the flow of profits to improve quality until he can chase you out of your market. That's happened many many times in many industries; that how our steel industry died, an an example.

As the dollar drops, our labor component will become cheaper, but our material and transportation charges will become more expensive. Yes, we do produce many raw goods domestically, but the miners and farms and lumber yards will sell to the highest global bidder. They'll do pretty well as commodities in general go up, which I think they will for quite awhile. But that won't help domestic manufacturers, because the price of those commodities in dollars will climb and climb, while the final selling prices of the goods they manufacture won't move nearly as far.

It would take an ENORMOUS change in the dollar's value to bring American and Chinese workers to relative par, and that will also bring their living standards to approximate par. That is NOT going to be a fun process for the American worker.

As an aside, we should have started this process about fifteen years ago; the reason the problem has gotten so dire is because we've been hiding the deflationary undertow of cheap Chinese labor by printing money. But games with money only last so long.

And, yes, the cost of transportation will rise, but there's such a HUGE labor cost advantage worldwide that the new balance will end up with sharply lower standards of living for Americans. I don't know exactly how we're going to get there, but I know where we're going to end up. Over the long haul, an American worker will end up with a similar living standard to a Chinese or Ethiopian or Somali worker of the same skill level.

Malor wrote:

The Chinese labor is so vastly cheaper than ours that we simply can't make goods as cheaply as they can until you get into things that require skill levels or knowledge that they don't have. In areas where they can field workers that can make a good, their cost advantage in labor is enormous.

Average hourly pay for a US manufacturing worker: $23.03
Average hourly pay for a Chinese manufacturing worker: $0.81

OG_slinger wrote:
Malor wrote:

The Chinese labor is so vastly cheaper than ours that we simply can't make goods as cheaply as they can until you get into things that require skill levels or knowledge that they don't have. In areas where they can field workers that can make a good, their cost advantage in labor is enormous.

Average hourly pay for a US manufacturing worker: $23.03
Average hourly pay for a Chinese manufacturing worker: $0.81

Tis true.... Though i wonder what the relative amounts vs cost of living is? These sorts of things are interesting to me.... thoug not necessarily a concern of international companies.

[edit] Maybe it's for a different thread.. But.... It is time we brought in a world-wide currency?

Sh*t is potentially about to get real:
http://blogs.abcnews.com/politicalpu...

Podunk wrote:

Sh*t is potentially about to get real:
http://blogs.abcnews.com/politicalpu...

I opened that in a new tab and it said "Govt officials: US expecting..."

America is having a baby?

Two government officials tell ABC News that the federal government is expecting and preparing for bond rating agency Standard & Poor’s to downgrade the rating of US debt from its current AAA value.

Well, that's certainly uncharted territory. One of the key hedging strategies for derivatives is holding AAA debt, and I'm not sure what will happen if that much AAA debt suddenly disappears from the market. Assuming the derivatives market doesn't just disintegrate, one thing is quite certain: the appetite for US bonds by the private market will be greatly diminished.

In a sane world, that would mean that the US would have to pay higher interest rates, and would be constrained in its borrowing, disciplined by the market into fiscal restraint. Market forces work, if you let them. But, with the Fed's backing, Congress will continue to borrow at very low interest rates, because the Fed will create any amount of money necessary to cover the bonds.

If this happens, in other words, expect to start seeing steady and accelerating inflation going forward. At first, it will likely be constrained to the peripheries of the world market as other countries try to hold their currencies at par with ours. But they're already having big inflation problems from doing that, and an additional flood of dollars from the center is likely to force them off that policy.

And that's assuming the whole financial system doesn't blow up. It could happen. If enough confidence in the US as the world's center has been lost, we could be in for some extremely rough times in the next five or ten years.

It's easy to blame the Tea Party for this, but no matter what happened, that debt downgrade was going to happen eventually. We are carrying an immense debt burden, and we are unwilling to pay the taxes to even stop running up the bill, much less pay it down. In a way, the Tea Party might be doing you a favor by forcing the crisis earlier rather than later.

It's harsh medicine, but if we can neither restrain spending nor increase taxes, the sooner the crisis comes and forces us back into discipline, the better for us as a country. The longer that snowball was allowed to get bigger, the worse the ensuing avalanche.

They couldn't have forced the crisis if we hadn't gotten ourselves into the crisis in the first place.

Malor wrote:

It's harsh medicine, but if we can neither restrain spending nor increase taxes, the sooner the crisis comes and forces us back into discipline, the better for us as a country. The longer that snowball was allowed to get bigger, the worse the ensuing avalanche.

The more frustrated I've become with the consistent failures in our government, the more of been in favor of having the re-adjustment and getting it over with. There were (and I would argue, still are) ways to dig ourselves out without the full brunt of the consequences, but I can't see any way for any of those to come out of the federal government at this point.

Kraint wrote:
Malor wrote:

It's harsh medicine, but if we can neither restrain spending nor increase taxes, the sooner the crisis comes and forces us back into discipline, the better for us as a country. The longer that snowball was allowed to get bigger, the worse the ensuing avalanche.

The more frustrated I've become with the consistent failures in our government, the more of been in favor of having the re-adjustment and getting it over with. There were (and I would argue, still are) ways to dig ourselves out without the full brunt of the consequences, but I can't see any way for any of those to come out of the federal government at this point.

Once again, part of what the ratings agencies are rightly looking at is the political situation in the US. And to say it's f-ed right now would be an understatement. I actually hope we get downgraded and get all the pain that comes with that. Perhaps that will convince those running for office or those voting that ideological purity is all well and good, but when you're destroying the country it comes at a cost. So perhaps we can start agreeing on tax increases, closing loopholes, winding down wars and other sensible things.

DSGamer wrote:
Kraint wrote:
Malor wrote:

It's harsh medicine, but if we can neither restrain spending nor increase taxes, the sooner the crisis comes and forces us back into discipline, the better for us as a country. The longer that snowball was allowed to get bigger, the worse the ensuing avalanche.

The more frustrated I've become with the consistent failures in our government, the more of been in favor of having the re-adjustment and getting it over with. There were (and I would argue, still are) ways to dig ourselves out without the full brunt of the consequences, but I can't see any way for any of those to come out of the federal government at this point.

Once again, part of what the ratings agencies are rightly looking at is the political situation in the US. And to say it's f-ed right now would be an understatement. I actually hope we get downgraded and get all the pain that comes with that. Perhaps that will convince those running for office or those voting that ideological purity is all well and good, but when you're destroying the country it comes at a cost. So perhaps we can start agreeing on tax increases, closing loopholes, winding down wars and other sensible things.

I wish that I could believe that this would convince them.

It's official.

The United States lost its top-notch AAA credit rating from Standard & Poor's Friday, in a dramatic reversal of fortune for the world's largest economy.

S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits.

U.S. Treasuries, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the United Kingdom, Germany, France or Canada.

Wow.

Holy crap.

I can't wait to hear Tuesday's episode of Planet Money.

I'm not surprised. Well I guess I am surprised in the since that I thought S&P was a joke and would never lower our rating. Thanks tea party for breaking America and I for one welcome our new Chinese overlords.

DanB wrote:

Holy crap.

Biggest question for people who know would be how the derivatives and other automatic triggers will be affected. For better or worse there are computer models making decisions on buying and selling with the US credit rating as one factor. Will this have an immediate effect or will it require someone actually entering a data point about the weight of the US credit rating? I think if I worked for a microtrading company that used complex models to buy and sell stocks I'd wake up on Monday and operate as normal, but I just don't know.

Well I am sure the talking heads on both sides of the political spectrum are going into overdrive right now. I just saw the headlines myself. My first reaction, however uninformed it might be, was "Good! Maybe Washington will start taking this seriously." The last few weeks of partisan finger-pointing has been nauseating.

Phoenix Rev wrote:

It's official.

It was smart of them to wait until after the markets closed on Friday to make that announcement. Now people have a couple days to calm down before things open back up. I still expect auto-triggers and general fear to tank things, but at least it won't be knee-jerk.

From S&P's report:

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. 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.

...

The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers. In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging. A new political consensus
might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population's demographics and other age-related spending drivers closer at hand.

So...good job Tea Partiers.

Minarchist wrote:

This is from Dave Ramsey this morning, whom I have to pimp since he's a fellow Brentwood-ian and I may try to get a job there soon.

‎If the US Government was a family, they would be making $58,000 a year, they spend $75,000 a year, & are $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget & debt, reduced to a level that we can understand.

Darn it Minarchist. I came here to post this.

It may make some people feel better to scapegoat the Tea-partiers, but any entity with a track record of wanton deficit spending to the degree of the US government is delusional to think they could keep a stellar credit rating for this long.

Nomad wrote:

It may make some people feel better to scapegoat the Tea-partiers, but any entity with a track record of wanton deficit spending to the degree of the US government is delusional to think they could keep a stellar credit rating for this long.

But that wasn't the main basis by which S&P chose to downgrade. From the statement by S&P as quoted above by OG:

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. 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.

That says a lot more than "cut government spending."

Japan had its credit rating cut 10 years ago. Guess what... They have record low interest rates now.

Credit Ratings Agencies are disregarding deflation. Their economic analysis is completely wrong. Deflation will prove them wrong again.

Most people are going to blame Obama for that, I think, not the Tea Party...

Is it really that big of a deal? Is the US going to explode or something?

Mex wrote:

Most people are going to blame Obama for that, I think, not the Tea Party...

Is it really that big of a deal? Is the US going to explode or something?

No it is completely political theater. Economics does not care about the theater. It cares about laws passed.

Nomad wrote:

It may make some people feel better to scapegoat the Tea-partiers, but any entity with a track record of wanton deficit spending to the degree of the US government is delusional to think they could keep a stellar credit rating for this long.

Also from the S&P report:

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

S&P specifically mentioned the right's intransigence about raising additional revenue as part of the reason they downgraded us. They're looking at the big picture that there needs to be *both* spending cuts and additional revenues to close the budget deficit and begin to pay down our national debt. They don't care that politicians signed a pledge to never raise taxes. The reality is that is has to be done.

Mex wrote:

Most people are going to blame Obama for that, I think, not the Tea Party...

Is it really that big of a deal? Is the US going to explode or something?

I think it's notable that a rating agency is saying essentially that America is less politically stable than Canada or other nations with a AAA rating. It says there are consequences for the US having such an unreasonable, F-Ed political system. There are consequences for spending 3 years questioning whether your president has any legitimacy or was even born in the US.

The full faith and credit of the US is based on the resiliency of the Democracy to all the terrible forces that try and pervert it. Unfortunately the last 10 years have been a disaster. I'm shocked this didn't happen sooner and frankly I don't see the US as a AA+ country.

Minarchist wrote:

This is from Dave Ramsey this morning, whom I have to pimp since he's a fellow Brentwood-ian and I may try to get a job there soon.

‎If the US Government was a family, they would be making $58,000 a year, they spend $75,000 a year, & are $327,000 in credit card debt. They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget & debt, reduced to a level that we can understand.

I think that comparison is just a wee bit slanted. To balance it a bit, I would add that the wage earners in the family are voluntarily working overtime without pay and steadfastly refuse to ask for a pay raise because they're afraid it would make them look bad to their bosses.

Oh, and also...

NPR News wrote:

Republican presidential candidate Mitt Romney also issued a statement. "America's creditworthiness just became the latest casualty in President Obama's failed record of leadership on the economy," he said. "Standard & Poor's rating downgrade is a deeply troubling indicator of our country's decline under President Obama."

Minarchist wrote:
Phoenix Rev wrote:

It's official.

It was smart of them to wait until after the markets closed on Friday to make that announcement. Now people have a couple days to calm down before things open back up. I still expect auto-triggers and general fear to tank things, but at least it won't be knee-jerk.

From my Twitter feed:

S&P Friday downgrade gives asset managers time over the weekend to rewrite their charters to exempt Treasurys from AAA requirement. #guess

China criticizes the US and calls for a new, stable global reserve currency.

Reuters[/url]]The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China's official Xinhua news agency said in a commentary.

I'm not an economist, but that seems like rather bad news.

Dimmerswitch wrote:

China criticizes the US and calls for a new, stable global reserve currency.

Reuters[/url]]The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China's official Xinhua news agency said in a commentary.

I'm not an economist, but that seems like rather bad news.

Doesn't China ask for that a lot though?