Stocks fell sharply as Standard and Poor's Ratings Services lowered its outlook on US debt from "stable" to "negative," citing concerns that American leaders will be unable to agree on reigning in budget deficits.
S&P reaffirmed the US's AAA bond rating, but warned those ratings might be lowered if there is no comprehensive agreement addressing debt by 2013. Lower bond ratings would force the Treasury department to raise interest rates on US debt.
After dropping as much as 250 points, the Dow Jones Industrial Average recovered to post a 140-point, 1.14% drop on the day.
Increasingly, credit rating analysts, bond traders, and speculators have weighed into politics, imposing their preferences on tax and spending choices. Portugal's recent plea for an EU bailout was prompted by so-called bond vigilantes lowering bond ratings that raised Portugal's borrowing costs beyond Portugal's reach. The ratings agencies forced Portugal to seek a bailout, and with it, all the service-slashing, pension-busting, people-bludgeoning strings that come attached with a bailout.
Most alarming, though, was that many analysts believed Portugal wouldn't have needed any bailouts and all the accompanying austerity flailing except for the intervention of ratings-manipulating the bond vigilantes. Portugal was relatively sound economically, and recovering from the global economic downturn. It's budget deficit was lower than that of other countries and was falling, and industrial orders and exports were on solid footing.
The bond vigilantes, however, didn't like Portugal's mix of market capitalism with its welfare state, state-owned businesses, and small-business investments. So, they attacked. The bond vigilantes in fact sought regime change in Portugal, forcing out Prime Minister Jose Socrates. The bond vigilantes wanted to slash government spending on its ordinary citizens, and divert the flow of Portuguese cash to the bond market plutocrats.
Now, S&P is putting the squeeze on the United States, and their Republican pols were quick to take up the call for slashing more citizen services and coughing up ever-greater tax subsidies for the rich.
House Majority Leader Eric Cantor (R-VA) said, "Today's announcement makes clear that the debt limit increase proposed by the Obama Administration must be accompanied by meaningful fiscal reforms that immediately reduce federal spending." President Barack Obama had until Friday insisted that raising the federal debt ceiling be "clean," with no ideological conditions attached. The President now acknowledges he will offer concessions to Republican demands for cuts and program overhauls.
The timing of the S&P's announcement appeared calculated to interject politics into the need for the federal government to raise its debt ceiling to avoid eventually defaulting on maturing obligations. Republicans would like to hold the debt ceiling vote hostage to their political agenda, demanding concessions including abolishing Medicare and replacing it with a voucher system that would transfer taxpayer dollars directly to insurers while leaving future seniors with coupons the Congressional Budget Office estimates would cover less than a third of their health care costs by 2030.
If the United States were to default on its debt obligations, the bond markets would be plunged into chaos, and the very same plutocrats who seek to manipulate policy through bond vigilantism would be eviscerated.
Plutocrats, bond market manipulators, and their Republican politicians scheme to gut public services in exchange for ever-greater tax cuts and subsidies for themselves, and cripple environmental and industrial oversight to free themselves of fair-practice, anti-fraud and environmental regulations. The S&P's timely interjection of credit rating warnings was seen by many as pressuring the Obama Administration into accepting Republican demands.
The Obama Administration downplayed the S&P's grandstand play. "We believe S&P's negative outlook underestimates the ability of America's leaders...to address the difficult fiscal challenges facing the nation," said Mary Miller, Assistant Secretary of the Treasury for Financial Markets.
US interest rates continue to be at record lows. The extension of the Bush tax cuts for the wealthy remained the single greatest contributor to growing US debt and budge shortfalls. Should House Budget Committee Chairman Paul Ryan's (R-WI) proposals to eliminate Medicare and slash spending be adopted, the rich would be granted another $2.9 trillion dollar tax windfall.
$2.9 trillion in tax breaks, along with taking Medicare's money, is enough to set plutocrat bond speculators' hearts aflutter. Hopefully, the prospect of bond market chaos resulting from the US not raising its debt ceiling and defaulting would dissuade bond manipulators' from playing politics and stiffen the Obama Administration's resolve against Republican hostage demands.