Stimulus 2.0? – Please no new Stimulus, the Effects Could Be Disastrous [View All]

[stevenleser]

http://www.opednews.com/articles/Stimulus-2-0--Please-no-by-Steven-Leser-090708-912.html
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July 8, 2009

By Steven Leser

As Vice President Joe Biden pointed out in an ABC interview on Sunday July 5, the stimulus isn't working as quickly as one would like and the economy is probably even worse than the administration figured. I wrote an article two April's ago http://www.opednews.com/articles/opedne_steven_l_080402_it_s_not_a_recession.htm that predicted:

... a Dow in the 7000-9000 range, the S&P 500 struggling to stay over the 1000 mark and a NASDAQ in the 1400-1600 range. I see unemployment and inflation both between fifteen to twenty five percent. I see many consumers defaulting on their credit cards and the major crisis in the banking and lending industry will be compounded by hordes of consumers defaulting on their credit cards
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My predictions regarding the stock markets turned out to be right on. The reason that inflation didn't get as high as I thought it would was that the other effects on the economy had such a dramatic impact on demand that they overcame the shortages in energy and food that I think still exist (I think these shortages will reassert themselves if the global economy turns around and demand returns to normal).

Unemployment is not going to get as high as I predicted because of the actions of two US Presidents to intervene in the crisis with bailouts and stimulus packages. Both Presidents Bush and Obama deserve credit for taking actions to prevent a greater collapse. Still, it seems like unemployment is going to hit 10%. While some people are angry and upset that it has gotten so high, and I feel for those people that are impacted, I am pleased it hasn't gone higher.

We have become a society and political culture that has no patience for anything. The talking heads criticizing the administration seem to have conveniently forgotten that during the last major economic crisis it took Ronald Reagan 18 months in office to make improvements in unemployment. I don't think it is possible for an administration to have a big impact on the economy in less than a year. Of course, the Obama administration deserves part of the blame here for not properly setting expectations. They should have said up front that we have to allow 12-24 months at a minimum to turn the economy around and they should have been out there regularly reinforcing that message.

The immediate problem that comes with the revelation that the Stimulus isn't working as quickly as some would like is that it has had an impact on the administration's polling in some states and this in turn has resulted in knee-jerk calls for a new stimulus package to accelerate economic recovery.

Besides the fact that we absolutely should not engage in any additional deficit spending out of principle alone, what those who are calling for this have not considered is whether a massive increase in debt may have the unintended impact of torpedoing the AAA rating of US Bonds.

The two main firms that are involved with determining Bond Credit ratings are Moody's Investors Service and Standard & Poor's. I wrote to Standard & Poor's asking them for an interview regarding whether a new Stimulus might impact US Bonds' AAA rating. While they declined the request, they sent me two recent (June 2009) releases by Standard & Poor's that discuss the creditworthiness of US Bonds and how they think there is no short term likelihood that the AAA rating is at risk. However, those politicians considering a second stimulus should be aware of this portion of one of those publications (see http://www2.standardandpoors.com/spf/pdf/events/FIArticle618097.pdf for the full article):

What Could Be Leading Indicators Of An Impending Rating Action On The U.S.?
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Those implying degradation of the U.S. fiscal profile to a point where it would differ markedly from that of other 'AAA' sovereigns

Leading indicators could include:

A forward fiscal forecast of persistent deficits that result in a lasting and material rise in debt in terms of GDP.

Discontinuous and significant upward jumps in the U.S. general government debt burden, perhaps resulting from the cost of a second round of assisting distressed U.S. financial institutions or government-sponsored enterprises.
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So, the AAA rating is not at risk unless we do something to massively and negatively affect government debt... like another stimulus.

What would happen if US Bonds were downgraded from AAA to AA? This April 15, 2008 article, http://74.125.95.132/search?q=cache:yaaqiof1FSkJ:bigpicture.typepad.com/comments/2008/04/could-the-us-lo.html+http://online.wsj.com/article/SB120818189112412691.html&cd=1&hl=en&ct=clnk&gl=us in the Wall Street Journal suggests that if this were to occur, "it would cost the U.S. government so much more in financing costs as to cause a depression -- estimates are for between 1-1.5 trillion dollars."

It is imperative that there be no new stimulus. The previous bailouts and stimulus packages did what was necessary to stabilize the economy and prevent a greater collapse. Most economists are predicting a robust recovery to start at the end of this year. The administration should issue a mea culpa at least to not being more clear with people how long it will take to get to a recovery and say we are on the right track for the stimulus to turn the economy around at the beginning of next year.