All hail the credit rating agencies. The Dow is tanking, at the time of this post down over 630 points, probably getting hit with margin calls. Gold is over $1700 an ounce. Oil is down $3 dollars a barrel as investors hunt for a place to hide. Currency exchange rates are bouncing. Panic is clear due to high market volumes and the fear index, otherwise known as the VIX, surged 40% in a day.
As expected, S&P's downgrade of the United States is resulting in further downgrades.
More and more S&P is being accused of playing politics, buying into Tea Party insanity, instead of objective analysis:
Standard & Poor’s, the rating company that downgraded the debt of the United States to AA+ from AAA for the first time, now finds itself assailed by investors led by billionaire Warren Buffett for making a political decision that has more to do with Tea Party politics than the financial stability of the U.S.
S&P officials, shrugging off a $2 trillion calculation error, blamed “uncertainty” in the policymaking process on Aug. 5 when they cut the assessment of the U.S. government’s ability to pay its debt, citing Congress’s failure to agree on as much long-term deficit reduction as the credit-rating company wanted. Buffett, the world’s most successful investor, said S&P erred and the U.S. should be rated “quadruple-A.”
S&P downgraded both Fannie Mae and Freddie Mac quoting their reliance on the government. If anything can be gleamed from a political position it is this reasoning.
Because the U.S. government -- through lenders including Washington-based Fannie Mae, Freddie Mac of McLean, Virginia, and the Federal Home Loan Banks -- is the country’s central source of mortgage funding, the downgrade could lead to higher borrowing costs for homebuyers.
As we've noted many times the real crisis is the destruction of the United States middle class. It is a jobs crisis. While we doubted the U.S. economy would slide into a second recession, we noted that one could not have a major adverse event. It could be S&P running amok with so much power is that event.
When the market plunges a favorite trick of corporations is to slash and burn their employees. They fire people like the Auschwitz concentration camp Kommandant in Schindler's List, indiscriminately. At a point with such a jobs crisis ongoing for 43 months, this could indeed be the tipping point. Consumer spending is already D.O.A. and real income, adjusted for inflation, has declined 13.7% from 2007. David Cay Johnston:
Because the budget deal is putting it all on the backs of the U.S. middle class, discretionary spending, this directly affects, negatively, GDP growth.
EPI also has done an analysis on the current budget cuts and shows the effects are, in terms of jobs.
Debt ceiling deal threatens deep job losses and public investment finds that the spending cuts in the deal will reduce GDP by $43 billion in 2012, lowering employment by roughly 323,000 jobs. The failure to extend the payroll tax cut will reduce GDP by $128 billion, resulting in roughly 972,000 fewer jobs, and the failure to continue emergency unemployment benefits will reduce GDP by $70 billion, resulting in roughly 528,000 fewer jobs. In other words, the debt ceiling deal will result in more jobs lost in 2012, relative to current budget policy, than have been created since employment troughed in early 2010.
Over half of the deal’s spending cuts will come from the NSD portion of the budget, which represents only 15% of the total federal budget. The deal’s initial spending cuts reduce NSD from 3.5% to 2% of GDP in 2021, the lowest level in over 50 years. If the committee tasked with producing additional cuts cannot agree to a plan, or if Congress does not pass it, the sequestration mechanism would reduce NSD further, to 1.7% of GDP. At the 1.7% level, NSD spending would be roughly half of what it is right now.
Moody's Economist Mark Zandi also has run GDP multipliers and concludes the latest budget deal will reduce GDP by 1%.
Like all great economies, when one moves to financialization, complete with bail outs and lobbyists, instead of a production economy and then gets a series of crazies out to destroy social safety nets and the U.S. middle class along with it, these are the results.
So, is a double-dip recession possible now? Yes, and it's all completely manufactured by the forces above, and the pain and suffering is unnecessary.