On Friday President Obama’s economic performance caught up with him. Bloomberg reports:
Egan-Jones Ratings Co. cut its credit rating for the U.S. one level to AA-, citing the potential for the Federal Reserve’s third round of large-scale asset purchases to weaken the dollar and drive up inflation.
U.S. debt to gross-domestic-product has risen to 104 percent from 66 percent in 2006, Egan-Jones said today in a report. The firm lowered the U.S. to AA in April. Yields on 10- year Treasuries have fallen five basis points since the end of that month to 1.86 percent.
The Fed’s latest program will “stoke the stock market and commodity prices, but in our opinion will hurt the U.S. economy and, by extension, credit quality,” Egan-Jones said. “The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers, thereby reducing consumer purchasing power.”
Mitt Romney spokeswoman Andrea Saul responded to the development in an e-mail to me: “Under President Obama, our country has racked up a record breaking $16 trillion in debt and seen an unprecedented credit downgrade. President Obama’s wasteful spending has stunted our economic growth, slowed hiring and caused the recovery to stall.”
Moreover, the Fed’s move isn’t fooling anyone and may create real problems of its own (inflation, a decline in the value of the dollar, a stock market bubble, etc.). Larry Kudlow (on whose CNBC show I appear) had this take:
More money doesn’t necessarily mean more growth. More Fed money won’t increase after-tax rewards for risk, entrepreneurship, business hiring, and hard work. Keeping more of what you earn after-tax is the true spark of economic growth. Not the Fed.
In the supply-side model, the combination of lower marginal tax rates, lighter regulation, and a downsized government in relation to the economy is the growth-igniter.
Money, on the other hand, determines the value of the dollar exchange rate and subsequently the overall inflation rate. A falling dollar (1970s) generates higher inflation, a rising dollar (1980s and beyond) generates lower inflation. . . . But what we have now are higher taxes and easier money. A bad combination.
In short, the Fed’s move is a vote of no confidence in Obama’s economic policy, a Hail Mary to keep the economy from diving (before the real fiscal cliff next year). It is a bad idea born of desperation, certainly not what the Fed does when we are on the “right track.”