Moody's: Living in Cloud Cuckoo Land

By Alan Grayson, Reader Supported News

15 September 12

esterday, Moody's Investor Service said that it might downgrade federal debt because the deficit is in danger of going ... down.

Moody's is one of the "Big Three" credit rating agencies. They are in the business of judging the chance that bonds might go into default. The market generally is of the opinion that U.S. government bonds have essentially no chance of going into default, because they are backed by the "full faith and credit" of the Government (a term that appears in the Constitution). As a result, the federal government generally pays interest rates lower than any private entity pays, and in times of financial crisis, government bonds are viewed as a port in the storm.

Last year witnessed the bizarre spectacle of Standard & Poor's, another credit rating agency, downgrading federal debt because the government almost stopped increasing it. Now obviously, if federal debt stops increasing, then it becomes easier to pay; the government is less likely to go into default. What actually was at stake in the debate over increasing the federal debt limit was this – would the Government go further into debt, or would it stick with what it had?

I don't remember any elected official, in either party, saying that the government should default on the debt that it had. In fact, because the Fourteenth Amendment says that, "The validity of the public debt of the United States ... shall not be questioned," I'm not even sure that defaulting on the debt would be constitutional. If the Government stopped borrowing more money, federal revenue would be more than enough to pay the interest on existing debt. But because we came close to not increasing the debt, S&P downgraded that debt.

I'm not saying that the federal debt limit should not have been increased (although I did vote against raising the debt limit - twice). I am saying that it is strange beyond words that a bond rating agency would downgrade the debt of any entity because it might not increase that debt.]

Yesterday, in a report called "Update for the Outlook of the US Government Debt Rating," Moody's, which is S&P's main competitor, took this illogic a step further. Moody's said that it would maintain a "negative outlook" on US government debt if the so-called "fiscal cliff" occurs. The "fiscal cliff" is the Orwellian propaganda term that refers to spending cuts and tax increases that automatically go into effect at the end of this year, if no bill is passed to change that. According to the Congressional Budget Office, these spending cuts and tax increases would reduce the deficit by $560 billion a year.

Since Barack Obama was sworn into office, we have endured incessant kvetching from certain quarters about the deficit and the debt. Now, if nobody does anything, that deficit drops by $560 billion a year, less than four months from now. And Moody's somehow thinks that that's a bad thing for bondholders?

It's a bad thing for the unemployed; they stand to lose $40 billion in unemployment insurance. But a bad thing for federal bondholders? No.

Here is what I think. Moody's, like the rest of Wall Street, very much wants the Bush tax breaks for the rich extended. If we do jump off the so-called "fiscal cliff," then the Bush tax breaks end. So Moody's is playing the downgrade card, fear-mongering, to try to prevent that.

That's actually the generous interpretation. It's either that, or Moody's is living in what Aristophanes called "Cloud Cuckoo Land."

Courage,

Alan Grayson

Reader Supported News is the Publication of Origin for this work. Permission to republish is freely granted with credit and a link back to Reader Supported News.