THE NOOSE IS TIGHTENING....

Moody's made the first assault on the beachhead just yesterday.  Shockingly, Standard and Poors reinforced the rear guard today reporting they put the USA sovereign debt on credit watch negative.

Now here is the real kick in the pants;

"The long-term rating may be lowered by one or more notches into the AA category in the next three months if SandP concludes Congress and President Barack Obama's administration haven't achieved a credible solution to the rising U.S. government debt burden and aren't likely to achieve one in the foreseeable future, according to the statement. "

Note that it isn't like the Moody's warning that the debt ceiling negotiations were a reason for the potential downgrade, this explicitly states that the USA is on credit watch for its out of control spending.  In other words, EVEN Standard & Poors cannot be bought off anymore and just like several weeks ago with the Italian bonds, the rating agencies finally are stating the obvious.

Congress and the administration were just given a warning here and they better pay attention.  There are significant ramifications for downgrades and the biggest one of course is that we'll be required to by higher interest on borrowing.  We already know that the Fed (we) lose billions each time bonds trade 1 bps (basis point) higher.  We simply cannot afford an increase in borrowing costs now and rising interest expense simply adds to the problem of meeting our future obligations.

I'm increasingly repulsed by both political parties and  I only champion candidates that actually propose and support fiscal restraint and cutting EVERYTHING!  Note how I phrased that, I only care if they actually do what they say, not just say and not do.  Yes, that would include Rand Paul and Ron Paul who talk a good game and then suddenly can't get anything done.  I don't care if the program helps little old ladies, dogs, police, traders, bankers, beggars, or murderers, I want the programs and employment serving that program cut 10% tomorrow as an opening gesture.  I want Congress closed for half a year.  Finally, the department of Energy, Education, and Homeland Security need to be shuttered and all Federal Union contracts destroyed.  These should be a fine starting place to warm us up for discussions to move the retirement age for 40 year-olds and younger to 72 for Social Security.  Social Security tax caps need to disappear and benefits need to be means tested while Medicare and Medicaid outlays need to be reduced.  Finally, to cap off the blitzkrieg attack on government nanny-ness, waste, and fraud, the Patient Protection Act (Obama Care) should be thrown in the trash.

I haven't forgotten about defense spending either and that should receive a flat 15% cut and all foreign aid to all countries should cease immediately.  It is a travesty to think that Americans pay foreign aid to China so they can steal from us and rip us off and then lend to us.  It is wrong that Pakistan takes billions from us and then supports the Taliban that are killing our troops.  Once the money flows to other nations are halted we'll quickly find out if they were really our friends or not.

The rating agency actions are serious and our "representatives" in Congress and the guys in the administration better wake up.

It won't be long before the bond vigilantes come around and we'll see just how much fire power and creativity Bernanke has left.  The bond market is way bigger than the Fed balance sheet.  The Fed may be able to manipulate equity prices but he can't handle drinking from the bond market's hydrant if everyone starts selling treasuries.  He won't be able to keep rates at zero forever in the face of that kind of onslaught.  You can hear them saying, "Get a rope".




Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/