Have you noticed the news has been relatively slow lately?
What is conventionally thought of as “news,” that is. There’ve been no significant rumblings of revolution in still another Middle East country and calls to war. No oil spills. No earthquakes or tsunamis. No legislators caught with their pants down (literally).
But sometimes the news that ends up making a difference slips in under the radar of most people. We just don’t know what it will be. For example, will the current story that Standard & Poors has said that the US could lose its AAA rating end up being exceedingly significant? James Saft at India’s Economic Times certainly thinks it may:
Firstly, if the U.S. loses its AAA rating it could prove to be the turning point in a loss of confidence that starts a debilitating move out of not only Treasuries but dollar assets. After all, the U.S. won’t default on debts which it can erase with the flick of the switch on the printing press, but it may well inflate its way to making dollar holdings very bad investments.
Secondly, the lack of alternatives means that a move out of Treasuries, if it ever came, would be hugely distorting for the rest of the world’s debt ecosystem. There simply aren’t enough “safe” alternatives.
But others think the story’s so ridiculous it’s to be laughed at. Here’s James Fallows at the Atlantic, among others:
What I’d really like to know is who S&P likes in the Hornets-Lakers series, or this season of American Idol. Their views would carry just as much weight.
Har de har har har. Fallows also describes James K. Galbraith’s response as a “derisive guffaw.”
This derision is based at least in part on their very correct observation that S&P hasn’t exactly covered itself with glory in its predictions and ratings in recent years. Then again, as Haft points out, S&P’s problem was not jumping the gun, it was the opposite:
One argument advanced for why we shouldn’t care about the threatened downgrade is S&P’s (and other ratings agencies’) track record of being spectacularly wrong, first in various emerging market sovereign crises and then during the housing bubble.
I’d argue the opposite; ratings agencies have a reputation of being timid and late, and are also beholden to government-granted status as Nationally Recognized Statistical Ratings Organizations for much of their business. That one of them steps up and threatens the U.S.’s rating is a sign that cannot be ignored.
A worrisome and highly related issue that been on many minds for quite some time is the deficit. But it’s only a biggish story when something new happens: Paul Ryan’s plan comes out, Obama makes a speech, Congress tackles the budget. But we can always speculate on how big it will become in the future, and what we might need to do about it:
..[T]he best back-of-envelope estimate is that meeting this unfunded portion of our Social Security and Medicare commitments would require roughly an immediate 80 percent increase in federal income taxes, sustained forever.
That is one end of a spectrum. The other is to cut out $100 trillion of present value of anticipated entitlement spending.
I was at a dinner last year with about 15 well-known Washington think-tankers, academics, journalists, bloggers and budget experts, entirely focused on the question of where on this spectrum we will end up. What was striking to me was that as we went around the table, the majority of these people asserted confidently what would be politically feasible or infeasible positions. Many of these equally confident-sounding assertions were contradictory and, not shockingly, tended to line up roughly with each speaker’s political inclinations.
It would be simple for me as an economic conservative to dismiss the idea of a tax increase equal to an 80 percent increase in income taxes as politically unrealistic, but I’m not so sure about that. In the event of a crisis, I could easily imagine “emergency” income taxes on the “most fortunate among us” plus some increases in middle-class tax rates, plus the introduction of a VAT, amounting to something like that.
If you had asked me at a New Year’s Eve party in 2006 what I thought the odds were of the U.S. government taking a controlling interest in the largest bank, the largest car company, and the largest insurance company in America, I would probably have laughed at you. Yet within 36 months, this is exactly what had happened.
My friends who are more liberal than I probably should not make the analogous mistake of imagining that benefit reductions that seem absurd politically right now might come to seem less absurd, and surprisingly quickly.
If you think about it, any real solution to the federal deficit problem is currently politically impossible; yet we know mathematically that, barring a productivity miracle, the situation cannot persist indefinitely. Therefore, we know that some change that currently seems politically impossible is all-but-certain to happen sooner or later.
Prognostications have a funny way of not panning out. Yes, a few people always manage to have been right, or nearly right, about a future event. But are they consistently and reliably right? Those would be the people to listen to. But who are they?