It is Thanksgiving in the United States, but in Europe, it’s a normal business day. From 
:
Portugal Hit by Downgrade and Strike
By Patricia KowsmannLISBON—Portugal suffered a double blow Thursday after Fitch Ratings downgraded its debt to junk, just as a nationwide strike shut public services amid growing discontent over austerity measures that are pushing the country into a deep recession.
Fitch, which matched Moody’s Investors Service’s move in July to place Portugal in junk territory, lowered its rating one notch, to double-B-plus from triple-B-minus, and warned further downgrades were possible because a recession in the country will increase challenges for the government to comply with its austerity plans. It maintained a negative outlook.
“The country’s large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook mean the sovereign’s credit profile is no longer consistent with an investment-grade rating,” Fitch said. “However, Fitch judges the government’s commitment to the program to be strong.”
Much more at the link. And France is in the process of trying to shoot the messenger:
France Calls for S&P Sanctions
BY William HorobinPARIS—French finance minister François Baroin Thursday said a probe into an erroneous message sent by Standard & Poor’s Ratings Services on France’s sovereign rating is legitimate and any sanctions should be adapted to the significance of the error.
Standard & Poor’s did not downgrade France’s AAA credit rating, but an erroneous message to subscribers said that it did. The S&P said that the message was not an indication that they were considering a downgrade, but investors were worried, and there’s enough concern about France’s sovereign debt that it was believable:
“If it had been Germany, anybody would have just laughed it off,” said David H. Levey, a former sovereign debt-analyst at Moody’s Investors Service. “But with France there is enough questioning going on that it’s particularly one you don’t want to send any false information about.”
As word spread Thursday about the message, the euro weakened against the dollar, U.S. stocks slipped and French bond prices fell, pushing yields higher. Cash reversed course, flooding into U.S. Treasurys and German government bonds. S&P’s subsequent clarification calmed stocks and most other markets, though French bond prices gained back only a small amount.
The error comes after Moody’s, a rival ratings firm, warned on Oct. 17 that the outlook on France’s rating was under pressure.
That story was from November 11th, almost two weeks ago, but now we are seeing pressure on German government bonds; a planned German bond sale of roughly €6 billion was cut short due to a lack of buyers, which raises the obvious question: even if S&P and Fitch’s and Moody’s haven’t lowered Germany’s AAA credit rating — and Germany has the strongest economy in Europe — does the “disastrous” bond sale mean that individual investors already have?
The French government might be just hopping mad about the erroneous message from Standard & Poors (a unit of McGraw-Hill Cos.), but the problem isn’t the erroneous message, but that it was believable. Matthew Lynn wrote, on August 10th, well before the S&P error:
First, French debt is escalating rapidly. It might not be as big as that of some other countries yet, but it’s getting there fast. Last year it ran a deficit of 7% of GDP. French debt will total 90% of GDP this year and 95% in 2012, according to estimates by Capital Economics. That isn’t exactly running out of control — but it is getting very close. Indeed, it’s around the same levels of debt-to-GDP that earned the U.S. a downgrade. And France is racking up fresh debt at a faster rate than countries such as Italy or Spain. It is hard to see how you can feel comfortable about that.
Next, France is steadily losing competitiveness against Germany — in exactly the same way that countries such as Italy and Spain have, except not quite so quickly. France, a major manufacturing center, used to run healthy trade surpluses; now it runs big deficits. The balance of trade for the six months to June showed a deficit of 37.5 billion euros compared with a deficit of 27.6 billion euros in the last six months of 2010, figures released last week showed. The deficit with Germany, its major trading partner, is running at a billion euros a month. Back in 2004, it was regularly running surpluses of a billion euros a month. Countries with big, persistent trade deficits — as any American can testify — have to borrow to fund themselves. The bigger the debts they run up, the greater the risk of a downgrade.
Third, if the U.S. has a dysfunctional political system, then France is not much better. Like the U.S., it has separate elections for the president and the legislature, creating a system that is often close to paralysis. And no other country in the developed world is quite so resistant to economic reform: Any modifications to working hours or pensions or welfare plans brings out rioters and is usually swiftly abandoned.
The problems of Europe are simple, and fundamental: they are living better than their productivity justifies. It can make sense to borrow money to make some form of improvement before you could otherwise pay for it, if you have a reasonable path for paying off that debt and returning to a balanced budget. But the European nations have no such reasons or plans: they spend more than they earn to fund health care and pensions and all sorts of individual benefits, and they keep piling up debt in the process, never paying it off, and apparently not even planning to pay it off. At some point the European nations will have to live within their means voluntarily, through an ordered process, or they will have to live within their means involuntarily, through a chaotic debt and economic collapse. The second option might just be closer than they think.
The Wall Street Journal
I’m not liking these series of horror tales
Then you won’t like this, either:
Those who believe that Keynesian policies are the right answer to our economic problems should note that the costs of borrowing to support a Keynesian plan would be very high.
Once again, I don’t know how you expect recovery to ever have a chance for economic recovery if we follow your suggestion, Dana, of austerity without job creation. Job creation is required in order to increase demand which then spurs GDP growth, i.e., the Keynesian approach, which has an historical justification going back to the Great Depression up through certain periods post WWII. And again, introducing austerity destroys jobs, as, for example, the UK has recently demonstrated. I simply cannot understand why you would propose an austerity only policy for us given what I’ve repeated here, to which you, Dana, have never adequately countered, because you lead with ideology instead of practicality based on historical precedence. That’s no good!
We tried a Keynesian approach, just a couple of years ago, and it didn’t work, didn’t perform as advertised.
And Europe has been trying to “stimulate” their economies, for a long time now, borrowing and borrowing and borrowing, so that their citizens could live better than their production would support, and now it’s all collapsing on them.
The responsible leaders of Europe have recognized that the continual over-borrowing has been what has gotten them into this mess, and that’s why they are going with sensible policies. Oh, they know that austerity measures won’t be popular, but they recognize that there really is no other choice at this point. If your notions of continued borrowing to stimulate their economies actually worked, don’t you think that those politicians in Europe, all of whom are to the left of politics in the US and all of whom have to face the voters again, would want to go that route?
Maybe you didn’t read the article or the comments above. Germany tried to sell bonds — that borrowing you support — and couldn’t find enough bidders. Italy had to raise €8 billion, and wound up having to pay twice as much interest as just a couple of months ago. Those are facts, period, and they fly in the face of the economics you propose.
Again, Mr. Editor, it did work, to pull us out of a recession sinking fast toward a depression, and it enabled a steady increase in the growth of GDP. The problem is that you refuse to acknowledge this.
Consider how much better we are doing than the euro nations, even Germany now, which is growing GDP at about 0.5%, compared to us at 2.1%. Closing the deficit gap and lowering debt depends on a growing economy, thus producing increased revenue and requiring less of an outlay to help feed the unemployed and the poor. Instead, you favor austerity, which will slow GDP growth and reduce jobs. Moreover, I take it that you would end unemployment compensation and food stamps, and reduce entitlement benefits. And you think this will bring prosperity? I just cannot accept your view, Mr. Editor, because it simply lacks good sense, and unlike the Keynesian approach, lacks any example of success of which I am aware. If you think I am wrong, give me an example other than your belief that our stimulus did not work, because your belief does not pass the smell test! I need you to give another example. I don’t think you can. On the other hand, on the positive impact of a stimulus, I believe that I can give examples, plenty of them.
Mr Wheel wrote:
While I’m certain that you can cite the opinions of others who assert that things would have been worse without the stimulus plan, those things remain just that: opinions. You cannot prove anything, because you cannot say, for certain, what would have happened had it not been passed.
However, we do have the published expectations of the President and his economists about what the stimulus would accomplish: holding unemployment to a maximum of 8%, while it would top out at 9% if we did nothing. President Obama was kind enough to give us the measurement criteria he expected us to use . . . and I do.
And that creates yet another problem for you. When you look at all of the statistics given by those who claim that the stimulus prevented something much worse from happening, you wind up citing the same people who gave us the 8%/9% numbers. If they were so wrong on that, why should we give their opinions any credence on other things?
The sad fact is that we have been trying Keynesianism for far longer than Barack Obama’s stimulus plan. We imported outside money, through borrowing, for most of George Bush’s tenure as well, running up substantial deficits — or at least what would have been called substantial before President Obama got in; now President Bush’s deficits look like nothing — to pump more money into our economy than we actually earned through our production. If Keynesian economics worked, we should be awash in jobs and wealth! If Keynesian economics worked, Greece should be the strong man of Europe.
Borrowing money for some specific, growth-oriented purpose can make a lot of sense, if that borrowing leads to increased productivity and enough future wealth to pay off your loans. The problem is that we never finished the process, never paid off the loans, and finally the weight of the debt service is crushing us. We have been Keynesians for so long that we can no longer be Keynesians.
That is certainly true, but educated opinions are not to be discarded. We can also look to the past. For example, FDR stimulated the economy with spending on infrastructure, 1933-37, and it grew GDP and almost halved unemployment. In 1937, he chickened out on his own stimulus, went into austerity, and what happened? GDP retreated and unemployment increased is what happened! These are facts documented abpve, Mr. Editor!
Then, in the same cite, look at what happened to GDP and unemployment post WWII during our transition from a war economy to a peace economy, with millions of GIs coming home needing jobs, at a time when federal income taxes had skyrocketed.
of the lowest and highest income tax brackets by year. You will note, Mr. Editor, that federal income taxes remained quite high by today’s Bush tax cut standards until Reagan started to lower them to the point where first Bush-I, then Clinton had to raise taxes again.
Please give my your basis for claiming that immediate austerity will solve our economic problems, Mr. Editor, or is it just your ideology all over again. Then I am not convinced!
Blah, blah, blah, blah. You keep repeating this, and I get it. Yes, the prediction was quantitatively off, but the stimulus lowered unemployment from over 10% to about 9%, so progress was made with the stimulus. Moreover, there has been a continuing increase in GDP, compared to the negative GDP trend that Bush left us with. So under extremely difficult economic conditions, progress has been made.
This is a too simplistic view, because it does not take into account a dysfunctional US Congress, and an opposition party which is hell-bent on doing everything possible to prevent a black/Democratic President from having a second term, to the point of putting party over country regarding priorities. Senator McConnell has been giving this message repeatedly, thus making progress on lifting the economy an order of magnitude more difficult.
Mr Wheel wrote:
There are plenty of “educated opinions” on both sides; if we are not to discard educated opinions on one side, then we must also treat with respect the educated opinions on the other.
The Depression was a special circumstance, which you believe has lessons for today. But what we did during the Depression could not be duplicated today, due to the very different financial environment. During the Depression, the United States government borrowed from the American people; by 1946, after huge borrowing for both the Depression spending and World War II costs, only 1% of the entire national debt was owed to foreign governments and individuals. Today, we owe 46% of the national debt, exclusive of the portion owned by the Social Security Trust Fund, to governments, corporations and individuals abroad. To borrow more money to finance another Keynesian stimulus round means borrowing roughly half of that from foreigners, and that means that the recovery you think such a stimulus would generate would be dampened down by the requirement of sending those loan repayments and interest payments outside of our economy.
There are other major differences. In 1946, 45% of the world’s industrial capacity was in the United States. Many of today’s industrializing nations were, in 1946, primarily agrarian, while our pre-WW2 industrial competitors had seen a substantial part of their industry destroyed by the war. We had a tremendous advantage at the end of the war which does not exist today.
At the end of the war, we were a net exporter, by a very large margin of industrial goods, food and petroleum. The riches of the world were flowing into us because of that. Today, we are a net importer of manufactured goods and petroleum. Borrowing money from China to stimulate our economy today would mean borrowing money which would have to be repaid to overseas concerns, to send overseas to buy foreign manufactured goods and oil. We would perhaps see a short term economic gain, but it would definitely be followed by a longer term slowdown of growth, as the fruits of our labor would be increasingly sent abroad to repay our debts. The conditions today are simply so much different from the 1930s and 1940s that the solutions of those times would not work today.
The United States is one of the most politically conservative of the industrialized nations. But if you look at the more politically liberal members, primarily the European democracies, you will see a series of parliamentary democracies, governments in which there is no minority party obstruction allowed, by design, and governments in which the chief executive must be controlled by the majority party. (France is an exception, in that the President is separately elected.) And what do we see amongst them? We see those nations embracing, albeit reluctantly, economic policies which are similar to what I have written we should adopt here. Greece and Portugal and Italy aren’t adopting austerity budgets because they want to; they are adopting austerity budgets because their choices are between austerity now, and a hoped for gradual climb back into some reasonably prosperous state, or disordered financial collapse; the choice you believe we should take here isn’t an option for them. We see the United Kingdom, which does control its own currency — the UK never abandoned the pound Sterling for the euro — led by a Conservative Party which is still to the political left of our Democrats, pushing an austerity plan, because the UK really has no other choice.
And whether you realize it or not, we really have no other choice, either. What you would have us do would simply push us closer to the financial problems belaboring the Europeans. We are in better financial shape than they are — barely — which means that we may be able to have a softer landing into a tighter budget than they will have, but we really face the same two, and only two, options that they have: an orderly attempt to return to a more conservative economy, or a financial collapse. The option you prefer, to borrow and spend more, in the hope of stimulating our economy to new heights does not realistically exist. The thrust of the main article was simple: even the strongest of the European economies are seeing increased borrowing costs because they have borrowed so much in the past, and investors are less confident that they can or will be repaid. The same will happen to us.
We have, like the Europeans, spent more than our production has justified and supported, for years and years and years. We have done so, in large part, out of compassion, out of a desire to see that the least productive Americans still do not have to live in poverty. And now the structure which we have built is crumbling, because the economic foundation on which it was built, is failing. And that means what you will hate the most, that the least productive Americans will be in greater poverty, while those who work harder and are more productive will be less charitable, less willing to give up their hard-earned dollars to support those who will not work, because they will have less, too.