As you’ve no doubt heard, on Friday, Standard & Poors (S&P) downgraded the United States’ AAA credit rating because the debt deal reached by the White House and Congress failed to cut the $4 trillion deemed necessary by the credit rating agency during the debate the debt ceiling:
S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn’t do enough to address the gloomy outlook for America’s finances. It downgraded long-term U.S. debt to AA+, a score that ranks below more than a dozen governments’, including Liechtenstein’s, and on par with Belgium’s and New Zealand’s. S&P also put the new grade on “negative outlook,” meaning the U.S. has little chance of regaining the top rating in the near term.
The unprecedented move came after several hours of high-stakes drama. It began in the morning, when word leaked that a downgrade was imminent and stocks tumbled. Around 1:30 p.m., S&P officials notified the Treasury Department that they planned to downgrade U.S. debt and presented the government with their findings. Treasury officials noticed a $2 trillion error in S&P’s math that delayed an announcement for several hours. S&P officials decided to move ahead, and after 8 p.m. they made their downgrade official.
S&P said the downgrade “reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” It also blamed the weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions at a time when challenges are mounting.
Because S&P left the U.S. short-term credit rating unchanged, the downgrade is unlikely to have a big impact on money market funds that own U.S. Treasury bills.
As you can imaging, there were insults traded from both sides the aisle over the weekend. Obama Administration officials, who were already anticipating the action, contend that S&P made a $2 trillion mathmatical mistake in their calculation and analysis of the situation. S&P acknowledges the mistake, however, they still decided to downgrade because they don’t believe the fiscal situation will get better, especially in the long-term.
And while the Left spent most of the weekend blaming the tea party movement for the downgrade, there needs to be a reminder that President Barack Obama was pushing for a clean debt limit increase. His administration didn’t believe they should have to cut spending with the increase simply because it hadn’t been done before.
For once in my life, I’ve found myself agreeing with Sen. John McCain (R-AZ), who said on Meet the Press yesterday that we have no one to blame but ourselves for the fiscal trouble that the nation faces:
“On the S&P thing, don’t shoot the messenger,” McCain said on NBC’s “Meet the Press”.
McCain said most policymakers agree the nation is on an unsustainable fiscal path.
“Is there anybody that believes that S&P is wrong in their assessment of the situation — of the fiscal situation of this country?” he said.
McCain said the real problem is the unsustainable growth of popular entitlement programs, which Congress is reluctant to cut.
“The elephant in the room as we all know is Medicare and Social Security,” he said. “And unless we are ready to reform those entitlements, we are not going to have a long-term fix for our physical problems.”
However, what McCain doesn’t realize is that our problems aren’t limited to entitlements; according to Laurence Kotlikoff, an economist that served in the Reagan Administration and current teaches at Boston University, we have much more in obligations than most realize (emphasis mine):
“We have all these unofficial debts that are massive compared to the official debt,” Kotlikoff tells David Greene, guest host of weekends on All Things Considered. “We’re focused just on the official debt, so we’re trying to balance the wrong books.”
Kotlikoff explains that America’s “unofficial” payment obligations — like Social Security, Medicare and Medicaid benefits — jack up the debt figure substantially.
“If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That’s the fiscal gap,” he says. “That’s our true indebtedness.”
We don’t hear more about this enormous number, Kotlikoff says, because politicians have chosen their language carefully to keep most of the problem off the books.
“Why are these guys thinking about balancing the budget?” he says. “They should try and think about our long-term fiscal problems.”
Obviously, the news of a credit downgrade is not what the market wants to hear after the worst week since the 2008 financial crisis. The market will no doubt react negatively, as Futures indicated over the weekend. What’s worse for President Obama is that the unemployment picture isn’t looking better for elction day.