Moody’s downgrades the whole country

Read the excerpt below. Digest it, understand it. In one paragraph, Moody’s hints at what is effectively happening. State revenues are declining. The implicit ramification is that Federal revenues are declining too. However, the effect of declining revenues is not linear. The impact of declining revenues is geometric as it works its way up the ladder from individual households to the Federal Government. This is deflation at work.

As I take pains to point out, in an economic environment characterized by excessive debt, deflation has devastating consequences.

Someone better find a way to get inflation going again soon. Failing that, Western industrialized nations will have to default on their debts.

If you believe that the USofA, the UK or the EU could plausibly come out and declare bankruptcy, then we’re ok. Our life style will need to be revised and adjusted but we’ll be ok. Argentinians survived debt default in the late nineties.

But I say that sitting on high horses as we do in the West, default is not an option. Default is something that happens to banana republics. Western nations don’t default. That being the case, if the West cannot default but, at the same time, cannot make good on its debts, then what?

“But it seems overspending and the hollowing out of the revenue base is a nationwide phenomenon affecting cities and states everywhere.

And of course the US government is affected by those same phenomenon — we think the government’s revenue expectations remain wildly optimistic, given the slowdown and the collapsing of the income gap — but alas the Fed still has the printing press and should be able to hold onto its AAA rating for awhile longer.”


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