Debt and Taxes

Does it really better that the US' credit rating has been downgraded?  On one level, of course it does.  But as far as truly practical reasons, it might not really  matter.

China is by far the biggest holder of US debt.  More importantly, China has been the only nation (read: lender) that has significantly increased the amount it has given to the US over the past year - the US has borrowed from China about $250 BILLION between May 2010 and May 2011.  No other nation even comes close.

So, China is, in effect, the only bank in town.  China doesn't need references from our neighbors and relatives to vouch for our credit-worthiness; China knows how much we make and how many kids we have to feed.  Track records and good intentions don't mean anything when China can do the math and knows that America has finally reached the tipping point.

How does a debtor show his/her potential creditors that despite having a negative debt to earning ratio, he/she is a reasonable credit risk?  Again, a track record of paying your bills doesn't matter much when you owe more than you earn.  I submit that the answer is to show the creditor that you are making changes to your lifestyle, that you are tightening your belt a bit.  I don't think you get there by insisting that your boss will give you a raise next year.

Harry Reid continues to claim that the answer is a "balanced approach" that includes raising taxes revenues.  This is garbage, but I hope he takes time every day for the next 14 months to stand in front of a microphone and tell voters that he wants to raise taxes.  Raising taxes is dumb for a number of reasons.  First of all, we are in the throes of a recession, and you don't raise taxes during a recession.  Second, Bernanke is gutting the value of the dollar, so raising taxes lessons the amount of reduced-value dollars families have to spend, which will immediately impact the ability for families to save money and secondarily reduces the ability for people to purchase goods - starting with luxury items and moving on to necessities.  When consumer spending falls, retailers and manufacturers start laying people off.  That increases unemployment, which , aside from hurting an already fragile and damaged economy, reduces the amount of revenue taxes the government can collect to supposedly pay China off before it breaks our collective leg.

More importantly, signaling to our creditors that our national answer is to squeeze the workers for more taxes does nothing more than show that we see the problem but don't understand it.  To get our deficit under control in the semi-near future we need to cut spending.  Period.  Raising taxes gives a government that has already proven itself to be fiscally incompetent more money.  That seems dumb.  Would you teach your spendthrift daughter financial responsibility by giving her cash to pay off her credit cards, or would you also take the cards away from her and put her on some kind of allowance - new shoes be damned?  It's the difference between a bailout and a correction.  Harry Reid is demanding that wealthy people bail America out, and that they ask not what their country can do for them.  But we know how that will turn out, right?  I mean, we have already given the government a lot of money in taxes, and the government has borrowed yet more and spent a lot of it unwisely.  Why on earth would we or should we give them more?

What Harry Reid proposes is that the wealthy and corporations bail Washington out. He wants the money to be able to show that we are "getting serious" about paying our debt, but he doesn't want to have to cut any spending because that might cost him votes.  So, he needs to bailed out politically and turns to the people he rails against the most.  It would be polite if he would use the word "please" before trying to help himself to more money.

If a downgraded credit rating means that it is more expensive for America to borrow money, can't that become a good thing?  Make living within our means more attractive than going into debt.  Cut government spending, re-write the tax code with fewer exemptions and lower rates so that companies can put that money into new hires and increase the ranks of working people, which increases the size of the tax base which in turn increases the revenue that government collects. In short, let America work.