Amidst all the coverage of the efforts by the USA’s top leaders to avoid going over the so-called “fiscal cliff” if a US federal budget deal is not completed by the end of this year, one extremely important aspect of this negotiation is almost never discussed in the media. It was covered by the Washington Times (see link). The politicians are not negotiating in a political vacuum. There are huge background financial/monetary considerations which the establishment media does not seem to want to discuss in its coverage.
The article reports that all three of the USA’s top credit-rating agencies, Standard and Poors, Moody’s and Fitch, have all warned the USA’s politicians that unless a serious deal is reached between President Obama, the Democratic Senate and the GOP House of Representatives, all three agencies may downgrade US Treasury debt instruments. Their definition of a “serious deal” is one with a total of “$4 trillion or more in savings to stabilize the debt.” I am unaware of any potential deal among the seemingly-clueless politicians that reaches that level of savings. As the article notes, failure to reach this large a deal is likely to “add to the turmoil in financial markets at the end of the year by further downgrading of the credit ratings.”
As the article notes, “Moodys and Fitch Ratings warn that anything short of a major budget accord will lead to a downgrade” (emphasis added), and that any further downgrade by S&P will lower US debt ratings to at least two notches below AAA because they already have downgraded US debt below that top rating. This is serious folks. The article further indicates that these ratings decreases would likely lead to a huge sell-off in US Treasuries of all kinds because ”it would render US Treasury securities ineligible to be included in some investment funds that are required to maintain an average AAA rating on their holdings.” That means all such mutual funds and other investments pools would be required to sell-off their US treasuries…perhaps all at once.
It is pathetic to watch both parties jockeying for political advantage as the nation starts to head down the financial toilet. They both remind me of the imagery of Nero fiddling while Rome burned. The solution is obvious. The GOP must agree to higher revenues and the Democrats must agree to cut spending. Both parties need to agree on entitlement reforms. The rest of the world is watching these negotiations as well. If the political parties, locked in a stubborn battle of vanity, let the nation go over the fiscal cliff or merely “punt” the issue down the road again with a non-substantive agreement, the rest of the world will be further motivated to abandon US dollar investments and work behind the scenes to develop a new global financial system and come up with a new global reserve currency or a system of at least partially gold-backed regional currencies to replace the US dollar.
The “hard landing” at the bottom of the fiscal cliff could be a lot harder than most Americans (and politicians) realize. Revelation 17 warns the current global economic/monetary system will collapse during the latter days and be replaced by a new “global” beast system, and verse 16 prophesies the collapse of the current central-banking-based and US dollar-based system will be a very hard landing. Failure to reach a major agreement to cut the US deficit will apparently lead to major US debt downgrades, which could lead to a global sell-off of US Treasuries. Once such a sell-off starts, it may be hard to stop. It may become self-perpetuating as the rest of the world finally gives up on the ability of the USA’s leaders to ever get the USA’s financial house in order.
I’m not predicting any particular outcome. I’m simply pointing out possible alternatives and noting that the risks of not reaching a major debt accord are a lot greater than the politicians and the TV talking heads are willing to discuss.