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    We already were headed for a downgrade because of too much, not too little, debt

    We already were headed for a downgrade because of too much, not too little, debt

    Yesterday Moody’s issued a warning of a possible debt downgrade if the debt ceiling dispute created a situation in which the U.S. defaulted, even though Moody’s acknowledged that “the risk is low.”

    Obama is using the possible downgrade as a major bargaining chip in negotiations with Republicans, threatening to take his case to the public (as if he hasn’t already?):

    “Don’t call my bluff,” the president said. “I am not afraid to veto and I will take it to the American people.”

    If Moody’s, the credit rating agency that announced a review of U.S. credit, downgrades the United States, President Obama said, ”it will be a tax increase on every American.”

    But a threatened downgrade by a major ratings agency is nothing new.  Both Moody’s and S&P have been warning for months about possible downgrades unless the U.S. addressed the rising debt problem.  The rising debt, not failure to incur more debt, was the concern.

    In January, Moody’s issued the following warning:

    Moody’s Investors Service said it may need to place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.

    The extension of tax cuts enacted under President George W. Bush, the chance that Congress won’t reduce spending and the outcome of the November elections have increased Moody’s uncertainty over the willingness and ability of the U.S. to reduce its debt, the credit-ratings company said yesterday.

    “Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” wrote Steven Hess, a senior credit officer in New York and the author of the report. The rating remains “stable,” according to the report.

    Here was a headline from January:

     In April, S&P warned of a possible downgrade because of rising U.S. debt levels:

    Sounding the alarm about the country’s deep fiscal problems, Standard & Poor’s on Monday downgraded its outlook on the U.S. credit rating to “negative,” raising the likelihood the U.S. will lose its coveted ‘AAA’ rating as Washington struggles to fix its beleaguered balance sheet….

    “We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns,” S&P said in the statement.

    Get it?  Regardless of the current political fight over raising the debt ceiling, we were on a path to a debt downgrade not because we were not incurring enough debt, but because we were incurring too much.

    So the current debate over a downgrade due to failing to raise the debt limit is a sideshow.  The issue is how we put ourselves on a path to lowering our debt, not how we raise the debt level.

    Raising the debt limit without a plan to reduce our debt accomplishes nothing.

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    Comments



     
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    Zachriel | July 14, 2011 at 3:45 pm

    quiznilo: “The markets will hold them responsible.” you would think that the markets would respond well to some budgetary sanity for a change.

    Yes, the markets would like to see the U.S. address its deficits within the next year or two. Putting a plan in place now would help stabilize the markets.

    quiznilo: “You *do* understand that it’s uncertainty regarding government overspending that is supressing economic activity,

    No. It’s due to lack of demand as a result of the financial meltdown at the end of the Bush Administration. The deficits are due to the large tax cuts during wartime coupled with the deep recession.

    quiznilo: And if wishes were horses, I’d be well fed.

    That’s the problem when Congress makes conflicting demands on the budget by mandating spending but not providing the funds. The funds are available simply by raising the debt ceiling, though.

    quiznilo: “What part of WE HAVE NO MORE MONEY is so hard to grasp?

    The U.S. has an annual GDP of about $15 trillion. Even assuming anemic growth of 2%, that represents $364 trillion over twenty years. The U.S. has more than sufficient capacity to meet its obligations without draconian measures.


     
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    david7134 | July 14, 2011 at 6:52 pm

    quiznilo,
    You seem to be playing fast and furious with numbers. This is a common problem. The fact is that the percent of public or government debt to GDP is running much higher than normal. I believe it is currently 60% and projected to be even higher soon. I don’t care about the real numbers so don’t bother searching the web, the point is that we can not and desire not to continue this level of government spending. In addition, government spending necessitates government intervention, rules, regulations in areas where we would prefer that it stayed out. I would indicate health care as a good example, the government has just about destroyed the concept over the last 30 years and will finish it off with Obamacare. As to the lack of recovery, look no further than Obama’s social programs, much less his anemic economic plans, as to the reason for a lack of recovery. Who would want to open a new business when Obama might awaken the next day, talk to his daughters and decide to outlaw your effort. You referenced Bush, be aware that Bush was a liberal, the only thing that he had in common with any conservative was that he thought conservatives are religous, so he became religous as well. He was wrong.


     
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    quiznilo | July 14, 2011 at 10:59 pm

    “The U.S. has an annual GDP of about $15 trillion. Even assuming anemic growth of 2%, that represents $364 trillion over twenty years.”
    You believe those numbers? we had 2% growth last year? Do you know how many changes they’ve been making to cook those books ever since Obama took office? We would be lucky to have real 2% GDP growth (not counting growth of government which is indeed included in that figure). Some economists are saying that true GDP growth is *negative.

    And this is another fallacy, suppose we did tax everyone at estimated 86% rate to match government spending. Do you think anyone would produce *anything* if the government was just going to take it away? Do you understand the stifling effects on economic activity that confiscatory taxation imposes? Debt is just taxation in a more hidden and subversive form. It devalues your savings and makes it very difficult for businesses to plan an forecast and provides structural incentives for stagnation.

    At this point, your 2% growth and $364 trillion is irresponsible speculation, as is your assumption that we only have to make up some $14.5 trillion in debt. This debt was only incurred in the last few years, our unfunded liabilities comes very close to that $364T in 20 years if not over it due to obamacare alone.


     
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    Zachriel | July 15, 2011 at 7:58 am

    david7134: The fact is that the percent of public or government debt to GDP is running much higher than normal.

    Yes. That’s what happens when you cut taxes during wartime, then overdrive the financial system into meltdown. It’s not cheap when you break your economy.

    quiznilo: You believe those numbers? we had 2% growth last year?

    The U.S. economy is growing at about 2% after a sharp decline during the recession.
    http://www.tradingeconomics.com/united-states/gdp-growth

    Even assuming no growth at all, the U.S. will produce $300 trillion over the next two decades. Normal growth is expected to continue, but it may take a few more years before the economy completely recovers. However, current U.S. fiscal policy needs to change, or the debt problem will increase.

    quiznilo: At this point, your 2% growth and $364 trillion is irresponsible speculation,

    Most economists think the U.S. will grow over 2% over the long term. As for irresponsible, the Republicans keep pushing a plan that presupposes 5% growth, which is just silly.

    quiznilo: This debt was only incurred in the last few years, our unfunded liabilities comes very close to that $364T in 20 years if not over it due to obamacare alone.

    People will continue to grow old and get sick. They will need health care. Most other developed countries already have universal health coverage, and pay half what the U.S. does, for comparable care. What you are basically saying is the U.S., the most powerful economy on Earth can’t afford to provide for its own people, even though other countries are already doing it.

    quiznilo: And this is another fallacy, suppose we did tax everyone at estimated 86% rate to match government spending.

    Federal spending is about 24% of GDP, largely due to the recession. Keep in mind that the U.S. had a budget surplus at the end of the Clinton Administration, so the problem is certainly not insurmountable.

    […] have 14 trill+ and counting in debt, and Moody’s is getting ready to downgrade our AAA rating unless we take steps to address the issue. But according to Democrat Socialist, Barbara Lee, our […]


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