On Friday, August 5, the credit rating agency,
Standard & Poor's, downgraded US debt from AAA to AA+.
Gerald Celente's view that S&P's downgrade of
the US Treasury's credit rating reflects a loss of confidence in the political
system was confirmed by the rating agency itself. S&P explained the downgrade as the result of
heightened political risks, not economic ones. The game of chicken over the debt
ceiling increase and the GOP's ability to block tax increases indicate that
"America's governance and policymaking is becoming less stable, less effective,
and less predictable"
The reduction in the government's credit rating to
AA+ from AAA is a cosmetic change. It remains a very high investment grade rating and
is unlikely to have any effect on interest rates. It is revealing that despite
the downgrade, US bond prices rose. It was stocks that fell. The financial
press is blaming the stock market decline on the bond downgrade. However, stocks
are falling because the economy is falling. Too many jobs have been moved
Interest rates could fall further as investors flee
into Treasuries from the euro because of sovereign debt worries; flee equity
markets as they continue to tumble, and as large banks charge depositors for
holding their cash. Indeed, the latter policy could be seen as an effort to
drive people with large cash holdings out of cash into government bonds. Japan
has a lower credit rating than the US and has even lower interest
More hard knocks are on their way. As the economy
weakens and the economic outlook darkens, new deficit projections will elevate
the debt issue.
The psychological effect of the S&P's downgrade
is likely to be larger than its economic effect. Many will see the downgrade as
an indication that America is beginning to slip, that the country might be
entering its decline.
There is no danger of the US defaulting on its
bonds. The bonds are denominated in US dollars, and dollars can be created
without limit. Moreover, the problem with the debt is less with the size of the
national debt, which remains a lower percentage of GDP than during World War II,
than with the large annual budget deficits. If equities continue to fall, if
flight continues from the euro, if bank fees drive people out of cash, it is
possible that the inflows into Treasuries can finance, for awhile, the large
annual deficit, removing the need for the Federal Reserve to monetize the
deficit via Quantitative Easing.
On the other hand, the weakening economy, given
traditional policy views, will likely lead to a renewal of debt monetization or
QE in an effort to stimulate the economy.
Continued debt monetization threatens the dollar.
Investors will move out of Treasuries and all dollar-denominated assets not
because they fear default, but because they fear a fall in the dollar's exchange
value and, thus, a fall in the value of their dollar holdings.
Debt monetization can cause domestic inflation (and
imported inflation for those countries that peg to the dollar) as, and if, the
new money finds its way into the economy. This has not happened to any extent so
far in the US, because the banks are not lending and consumers are too indebted
to borrow. But the fall in the dollar's exchange value results in higher prices
of many imports. So far, the inflation that the US is experiencing is coming from
the declining exchange value of the dollar. However, there is little doubt that
asset prices, such as those of Treasuries and stocks, have been inflated by the
Fed's monetization of debt.
To flee from the dollar, there must be someplace to
go. There are not alternative currencies large enough to absorb the dollars,
especially with China pegged to the dollar and the euro experiencing troubles of
its own because of the sovereign debt crisis in Greece, Spain, Ireland,
Portugal, and Italy. Dollar flight has driven up the prices of bullion and
Swiss francs. Despite the Swiss government printing francs to absorb the dollar
inflow, the franc continues to rise in value. As of the time of writing, one US
dollar is worth only about 76 Swiss centimes or cents. In 1966 there were 4.2
Swiss francs to the dollar, or 420 centimes to the dollar.
The rise in the franc is crippling Switzerland's
ability to export. The loss in the dollar's exchange value from dollar creation
causes other countries, such as Japan and Switzerland to inflate their own
currencies in order to hold down their rise. The Fed's dollar policy has
resulted in Russian leader Putin declaring the US to be a parasite upon the
world and the Chinese to call for other countries to control how many dollars
can be printed.
In other words, the US policy is seen as adversely
impacting other countries without doing any good for America.
What I have explained can be comprehended within
existing ways of thinking. Within this way of thinking, as the debt ceiling
imbroglio made clear, the policy choices are between eliminating Social Security
and Medicare or eliminating wars and low tax rates on the mega-rich in order to
eliminate the annual budget deficits that are threatening the dollar's exchange
value and enlarging the national debt.
However, it is often the case that more is going on
than traditional thinking can know about or explain. It is always a challenge to
get people's thinking into a new paradigm. Nevertheless, unless the effort is made, people
might never comprehend the behind-the-scenes power struggle.
A half century ago President Eisenhower in his
farewell address warned the American people of the danger posed to democracy and
the people's control over their government by the military/security complex.
Anyone can google his speech and read his stark warning.
Unfortunately, caught up in the Cold War with the
Soviet Union and reassured by America's rising economic might, neither public
nor politicians paid any attention to our five-star general president's
In the succeeding half century the military/security
complex became ever more powerful. The main power rival was Wall Street, which
controls finance and money and is skilled at advancing its interests through
economic policy arguments. With the financial deregulation that began during the
Clinton presidency, Wall Street became all powerful. Wall Street controls the
Treasury and the Federal Reserve, and the levers of money are more powerful than
the levers of armaments. Moreover, Wall Street is better at intrigue than the
The behind-the-scenes fight for power is between
these two powerful interest groups. America's hegemony over the world is
financial, not military. The military/security complex's attempt to catch up is
endangering the dollar and US financial hegemony.
The country has been at war for a decade, running up
enormous bills that have enriched the military/security complex. Wall Street's
profits ran even higher. However, by achieving what economist Michael Hudson
calls the "financialization of the economy," the financial sector over-reached.
The enormous sums represented by financial instruments are many times larger
than the real economy on which they are based. When financial claims dwarf the
size of the underlying real economy, massive instability is present.
Aware of its predicament, Wall Street has sent a
shot across the bow with the S&P's downgrade of the US credit rating.
Spending must be reined in, and the only obvious chunk of spending that can be
cut without throwing millions of Americans into the streets is the
Credit rating agencies are creatures of Wall Street.
Just as they did Wall Street's bidding in assigning investment grade ratings to
derivative junk, they will do Wall Street's bidding in downgrading the US credit
rating. Wall Street might complain about down-gradings, but that is just to
disguise that Wall Street is calling the shots.
The struggle between the military/security complex
and the financial sector comes down to a struggle over patronage. The
military/security complex's patronage network is built upon armaments factories
and workforces, military bases and military families, military contractors,
private security firms, intelligence agencies, Homeland Security, federalized
state and local police, and journalists who cover the defense
Wall Street's network includes investors,
speculators, people with mortgages, car, student, and business loans, credit
cards, real estate, insurance companies, pension funds, money managers and their
clients, and financial journalists.
As the financial sector has over-extended and must
shrink, Wall Street is determined to have access to public funds to manage the
process and determined to maintain its relative power by forcing shrinkage in
its competitor's network. That means closing down the expensive wars in order
to free up funds for entitlement privatization and to keep the dollar's role as
reserve currency. Wall Street realizes that if the dollar goes, its power goes
What insights can we draw from this
The insight that it offers is that although economic
policy will continue to be discussed in terms of employment, inflation,
deficits, and national debt, the policies that are implemented will reflect the
interests of the two contending power centers. Their struggle for supremacy
could destroy the rest of us.
Wall Street opened the game with a debt downgrade,
implying more are to come unless action is taken. The new Pentagon chief replied
that any cuts to the military budget would be a "doomsday mechanism" that "would
do real damage to our security, our troops and their families and our military's
ability to protect the nation."
Will Americans be so afraid of terrorists that they
will give up their entitlements? Will false flag terrorist events be perpetrated
in order to elevate this fear? Will Wall Street provoke crises that are
perceived as a greater threat?
From whom do we need greater protection than from
Wall Street and the military/security complex and from our government, which is
the tool of both?