Friday, May 22, 2009

S&P Warns Britain; US is Next

Yesterday, Standard and Poor announced that they may downgrade the credit rating of the United Kingdom later this year. At first, US treasuries rallied, but then they soon took a whopping three point loss. This could be just the beginning.

Standard and Poor made it clear that they do not believe the UK internal forecast that government debt levels will top out at 70 percent of UK GDP. Instead, S&P suggested that the UK is headed for 100 percent or more debt/GDP levels and that level would trigger a credit downgrade.

What about the US? The same wishful thinking pervades the Obama budget projections. According to the Obama budget, unemployment this year will top out at 8.9 percent, which is where it currently stands. Good luck on that one! Worse, the Obama budget projections suggest that in 2010 the economy will rocket to over 3.5 percent real growth. Where are their economists? These forecasts are beyond wishful thinking. They are absurd (and inconsistent with Obama's public statements and the public statements of Fed Chairman Bernanke).

Next week, the Treasury slogs its way through over $ 100 billion in treasury financing. This will not be easy and is merely one frightening week to be followed by many more as the credit markets are clobbered with Obama IOUs. It is an open question whether or not the US will be able to get these Treasury offerings done in 2009. Things get much, much worse in 2010 and thereafter. Hang on to your seatbelts!

Some take comfort in the fact that the dollar is the reserve currency of the world. It is hard to see why that is comforting since within a fairly short period of time, the dollar will be supplanted by something that Asian creditors feel more comfortable with than the Obama dollar.

The Obama Administration is living in fantasy land regarding the US National Debt. Having taken no action whatsoever on the entitlement programs (social security, medicard, medicaid) which will bankrupt the US if left unchecked, the Obama team has created a whole new raft of entitlements and wasteful spending that, by itself, will bankrupt the country even if social security, medicare and medicaid magically disappear.

Want to know why California is in trouble (and NY, New Jersey and most of the state governments)? Look at their mandated spending from federal programs in medicare, medicaid, education funding. None of these states have any chance of turning around their debt problems and Washington is one of the big culprits.

The orgy of debt by Washington and by profligate state governments (which are captive of the employee unions) cannot be sustained. The UK will likely be downgraded and ultimately default on its pound obligations. The US cannot be far behind.

Excessive leverage created our current financial plight. The Obama Administration seems determined to outdo the profligacy of the private sector by bankrupting the public sector with excessive leverage.

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