The irony of the U.S. sovereign credit downgrade is that the whole reason the Big Three US rating agencies exist is that they were granted a lucrative concession (by the government) to pontificate about what risk weighting can be assigned to a security put up by a financial entity (like a bank), as collateral on a loan…in order to prove (to the government) that they (the banks) were “adequate”.
So the “brave” S&P decision was a bit like biting the hand that feeds or the child who stupidly pointed out that the king wasn’t wearing any clothes.
Whether S&P will have their head cut off is an intriguing question right now; personally, having spent a little time in places with really nasty “kings” where the reward for calling a bunch of venal incompetent crooks, just that, is a bullet in the stomach and then you get thrown off a bridge (like in Syria for example), I’m standing well out of the firing line.
I’m not quite sure how that will play out, but from a practical standpoint you can still borrow more money if you put up AA sovereign debt as collateral than if you put up some AAA rated toxic assets, unless of course you are dealing with the Federal Reserve, because these days the Federal Reserve Agent will accept any old rubbish as collateral.
So does that mean I can roll up to the Federal Reserve with a pair of smelly old shoes, and they will pay me what I paid for them, five years ago? Probably not, you need to have connections in the right places to be able to work a scam like that; that’s one thing I learned in Syria, it’s all about connections; looks like it’s no different in America, just over there they throw you in jail under the three strike rule for dissent.
But one thing for sure is that the U.S. can still borrow at its pre-downgrade risk-free interest rates. And there is a lot of money in America, and even more owned by (a small minority of) Americans, kept outside America. Outsourcing was nothing to do with labor costs; if it was, then why didn’t that happen in Germany or Japan?
|Chart Source: Heritage.org (added by EconMatters)|
Outsourcing was about tax avoidance, period (see chart above added by EconMatters). 50% of the profits of S&P 500 corporations are made outside America where it’s much easier to avoid paying tax, and so what if the US economy tanks? The value of the S&P 500 is about what happens to the money that rich people control, what happens to the 20% of Americans who have zero or less, is irrelevant to that algorithm.
It wouldn’t be hard to get America back on track and Americans back in work, for example, here are three easy wins:
1: Charge a wealth tax of 3% a year on what Americans and foreigners with a right of abode in USA own; that would bring in $1.5 trillion a year. Is that unfair? Not at all, if you can’t make more than 3% on your assets a year, you don’t deserve them, and in any case setting the base rate less than inflation is doing that now, just poor people and people on fixed incomes are the ones that suffer.
Meanwhile the rich can make hay, borrowing from the Fed at 0% and lending to the Treasury at 3% (which is where the 10-Year is headed).
And if the rich don’t like that they can forsake the protection that they get by living in America, and go and re-locate to places where you need to pay much more in “protection” money; like Mogadishu or Damascus.
2: Put a $4 a gallon tax on gasoline to bring prices in line with prices everywhere else in the developed world; that would bring in $500 billion a year, and probably halve America’s current account deficit, which has to be financed by borrowing from aliens.
3: Cut military spending by half, I know Americans love to play Rambo and GI Jane so that rich people can go to sleep at night and dream of making more money, but $1 trillion a year for a country that just got downgraded, is a ridiculous luxury.
There you have it, $2.5 trillion a year; and if you wanted to get Americans back to work, just forget about corporate taxation altogether; it’s not as if it generates much money, particularly since corporations can avoid paying it by outsourcing, and the increased investment and employment would easily generate more tax than was lost.
And if you really want to get the show on the road, scale back income tax.
Will that happen?
Not likely, American politicians will do what they know best, they will dither and look for lobbyists to give them kickbacks, it’s no different than it is, say, in Syria.
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About the Author - Andrew Butter is Managing Partner of ABMC, an investment advisory firm, based in Dubai that he set up in 1999, and has been involved advising on large scale real estate investments, primarily in Dubai. (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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