Continuation to What's Next ?

Hmm.., as predicted in previous blog, things are moving relatively at high pace, I have got many of your personalized comment and can sense that things are not quite clear to many, hopefully you may understand why is it happening, this article may help you to dust out some, Basically when we are talking about the recession, it has a phenomena of repeating itself in certain time span, in general a recession followed by the recession is called as Double deep, that means we are sinking again. Every economy tries to make them safe from this double deep cause when it hits, it hits harder than the previous where in nation has shot all his bullets to get rid of previous recession and the present is the “Colt with no bullets”.

Now, let’s talk about our main concern, why is it happening again?

Well, Credit Rating agencies i.e., here I’m calling it as a CRA’s have lowered long-term  credit rating on the US to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating. They have also removed both the short- and long-term ratings from CreditWatch negative, its quite obvious when the notices are sent for further alert actions and you are not moving a thing, if you and me would have in there shoes, we would have also acted the same. The downgrade reflects rating agencies opinion that the fiscal plan that Congress and the Administration recently agreed to falls short of what, in CRA’s view, would be necessary to stabilize the government's medium-term debt dynamics.

More broadly, the downgrade reflects CRA’s view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than CRA’s imagine when CRA’s assigned a negative outlook to ratings. Since then, they have changed there view of the difficulties in bridging the gap between the political parties over fiscal policy, which makes unenthusiastic about the capacity of Congress and the Administration to be able to leverage their agreement into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon. The outlook on the long-term rating is negative. CRA’s could lower the long-term rating to 'AA' within the next two years if they see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government

Debt trajectory than we currently assume in there base case. This scenario can worsen the case and could lead to the huge slowdown or what we call a recession in the global economy that we have ever faced in history.

CRA’s lowered long-term rating on the U.S. because they believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and it will remain a contentious process. also it is believed that the fiscal plan that Congress and the Administration agreed to will falls short of the amount to what is believed is necessary to stabilize the general government debt burden by the middle of the decade. lowering of the rating was prompted by view on the rising public debt burden and perception of greater policymaking uncertainty, Nevertheless, CRA’s view the U.S federal government's other economic, external, and monetary credit power, which form the basis for the  rating, as broadly unchanged.

CRA’s have taken the ratings off CreditWatch because the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government's debt ceiling. In real means, they believe that the act provides sufficient clarity to allow them to evaluate the likely course of U.S. fiscal policy for the next few years. The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective and less predictable than what we previously believed. The debt ceiling and the threat of default have become political bargaining in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some of us imagine until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on flexible spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan predict only minor policy changes on Medicare and little change in other entitlements, the control of which we and most other independent observers regard as key to long-term fiscal sustainability. The opinion is that selected officials remain cautious of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated  peers. The difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal strictness and private-sector deleveraging. The common believe in the market that the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the variety point on the U.S. population's demographics and other age-related spending.

Fiscal Scenario" assumes a continuation of recent Congressional action overriding existing law.

We view the act's measures as a step toward fiscal consolidation. However, this is within the framework of a legal system that leaves open the details of what is finally agreed to until the end of 2011,  and Congress and the Administration could modify any agreement in the future, we maintain our view that the U.S. net general government debt burden will likely continue to grow. Under CRA’s revised base case fiscal scenario--which we consider to be consistent with a 'AA+' long-term rating and a negative outlook they now project that net general government debt would rise. Even the projected 2015 ratio of  indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act's revised policy settings. There revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced. From CRA’s perspective, the effect of these revisions underscores two related points when evaluating the likely debt course of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Similarly, the debt burden is slightly higher. Second, the revised data highlight the path of the current economic recovery when compared with bounce back following previous post-war recessions. The slow pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a constant drag on demand.

The long-term rating is negative. As the downside alternate fiscal scenario says, a higher public debt course than we currently assume could lead us to lower the long-term rating again we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'.