Monday, August 8, 2011
By now you have heard that S&P has downgraded the sovereign credit rating of the long-term debt of the United States from AAA to AA+. The markets, both stock and bond, will be sorting out the implications of this historic downgrade for some time. I found it interesting that the administration challenged the accuracy of the number used by S&P to come to its conclusion. The administration and the Congress are in denial and that is not a river in Egypt. The administration wants to chastise S&P for their math when the Administration and the Congress can’t get the math right and hasn’t for decades.
S&P made it very clear that the Federal government has serious deficit problems and that the level of debt to GDP was beyond what they believed was acceptable for a AAA credit rating. S&P made it clear that we needed to reduce our deficit by at least $4 trillion in order to maintain the AAA credit rating.
Telling someone that they need to reduce their amount of debt to keep their house in order happens to all of us. If we go too much in debt our credit rating declines and we have to pay more if we want to borrow more. We can reach a point when we have borrowed so much that we can’t afford the payments and we default. So, the players in the budget battle knew what they had to do and they flat out didn’t do it and S&P was forced to issue the downgrade.
In one of my blogs during the deficit battle I said that we are not reducing the deficit. Both bills will add an additional $9 trillion to the national debt in 10 years instead of $10 trillion. We didn’t cut the deficit we slightly reduced the speed of its growth.
Now that the horse is out of the barn will anybody care about the downgrade? The US Government bond market is the largest and most liquid in the world. No other market can handle the volume that our markets can process on a daily basis. Again, will anybody care?
Most people in America have no idea what the downgrade means. Over the next 12 months you can bet that the discussion of the size and cost of government will move up the ladder of importance right along with jobs. Look for the conservative right to blame the President because the downgrade came on his watch. He is responsible for 43% of the debt we have on the books. Congress is not without blame. They knew what it would take to save the credit rating and they failed to act.
I think one of the outcomes of the downgrade will be the cry from the voters to throw out both President and Congress in the 2012 election. If they forgot to lock the barn door they have to face the consequence of their actions. Let me point out that all the blame doesn’t rest with the president and the current Congress. Previous Congresses and Presidents are to blame for allowing the deficit to get out of control. While we can’t do anything about the past, we can do something about our grandchildrens future. The first thing that has to go is baseline budgeting. We can no longer allow the Federal government to raise the budget by 8% every year regardless of the income it receives. Baseline budgeting is causing us to borrow 40% of our yearly operating budget continually adding to the debt burden. The second thing we need to do is put in incentives for business to grow jobs. More people employed will mean more tax revenue to reduce the debt.
We must get rid of our mountain of debt. Only by making us free from the burden of debt can we be free to be the best that we can be.