Opinion: Hopeless fantasy (U.S. Credit rating)

POSTED: 08/8/11 12:23 PM

Credit rating agency Standard & Poor’s (S&P) on Friday Aug 5th downgraded the credit rating of the United States, stripping the world’s largest economy of its prized AAA status (money.cnn.com). The safest bets are stamped AAA. That’s where U.S.debt has stood for years. Moody’s first assigned the United States an AAA rating in 1917. The country’s new S&P rating is AA+ — still strong, but not the highest. What does this mean for the world? Since this has never happened before, it’s difficult to say how the financial markets will respond. Countries are rated on a sliding scale: theU.S., for example, had a top rating (AAA) which allows it to borrow cash at cheap interest rates. The lower the rating grade, the higher a nation must pay in interest payments to attract investors to buy its bonds. Anything that slips to junk status, such as Ireland, Portugal and Greek government bonds, is considered a “highly speculative” investment. Many institutional investors, such as government pension funds, are forbidden to invest in junk-rated bonds.

In July, S&P placed the United States’ rating on “CreditWatch with negative implications” as the debt ceiling debate devolved into partisan bickering. To avoid a downgrade, S&P said the United States needed to not only raise the debt ceiling, but also develop a “credible” plan to tackle the nation’s long-term debt. President Barack Obama made it clear in the beginning of the debt ceiling debacle that he wants a balanced approach, meaning that cuts that will affect the less fortunate must also be balanced with entitlements reform to raise more revenue. In other words corporation benefiting from tax breaks nobody else gets (e.g. Oil Companies) will have to be reformed. Tax increases for the wealthiest Americans earning over USD 250,000 per year will also have to take place. But Republicans refused a tax increase on corporations and wealthy Americans stating that it would hinder job creation efforts by corporations and small businesses. Now I can provide evidence to debunk the claim of Republicans but that is an article on its own.

“The tax code is very inefficient,” said Federal Reserve Chairman Ben Bernanke in an interview with “60 Minutes” this week. “Both the personal tax code and the corporate tax code. By closing loopholes and lowering rates, you could increase the efficiency of the tax code and create more incentives for people to invest.” TheU.S.corporate tax rate stands at 35%, the highest in the industrialized world. But finding companies that actually pay 35% is another story. Cruise ship operator Carnival (CCL), for example, pays only 2%, according to research from investment firm MF Global. Private-equity firm Blackstone (BX) — less than 1%. – CNNMoney –

Obama in my view folded like a lawn chair when he gave in to the debt ceiling deal. This is why I can never be a politician. What drive my behavior are facts. Just like nature only cares about imbalances and correction of such, so would be my approach. I have read many arguments for and against Obama’s wanting a balanced approach and it is simply amazing that many of the arguments given do not factor in key fundamental principles. Many people are reasoning from the environments they were exposed to which can have fundamental flaws and instructions. Reasoning folly is not only absurd but quite dangerous if you ask me. It further makes me see that when people say the fundamentals of scripture is faulty and contradictory, I can very well understand why many say such because truth is, many people know only what they were exposed to. So reasoning outside their frame of reference is highly impossible and thus is why we get so much conflicting statements from persons who do not understand deep economic fundamental principles just like persons who do not understand deep scriptural principles and instructions. Many people don’t even understand the things of this world less things of the heavens. Many parts of scripture relates very well to sound economic principles that if were applied the entire world would have never be indebted to itself, which is utter nonsense to be honest. In scripture, Jehovah himself ordained what he called The Year of Jubilee (Leviticus 25:8-54). Herein Jehovah, evidently recognizing the mathematically impossibility of continually collecting debts at interest compounded annually, declared a year to be held every 49 years, when debts would be forgiven and those willing could return to their homes. But do to a lack of knowledge, countries or the IMF and World Bank, bail out other countries by offering them a solution which is actually the cause of many country’s problems in the first place namely Debt and Debt Refinanced.

Let us continue to deny truth and hold on to man made principles, which have proven futile, and continue to hope that there will be a better tomorrow. I guess hopeless fantasy is better than no fantasy at all.

Emilio Kalmera

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