United Liberty

Moody’s says that the the United States is a step closer to having its credit rating downgraded:

The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.
[…]
Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

“We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”

The sad state of things is that there is no indication that spending habits are going to be scaled back. As we’ve pointed out here at UL before, the CBO recently reported that the budget deficits over the next ten years will add $9.8 trillion to the national debt.

As recently noted, the longer term picture is even worse. If our credit rating is downgraded, it means the cost of servicing debt will cost more due to the increased risk of loaning us money.

The cost of Washington’s fiscal irresponsibility is destroying this country.

Doug Elmendorf, head of the Congressional Budget Office, is warning that lawmakers must change course on fiscal policy:

In a presentation delivered before the National Association for Business Economics, Mr. Elmendorf noted that the choices needed to address the medium and long-term budget deficit will be “larger and more fundamental” than in the past.

“U.S. fiscal policy is on an unsustainable path that can’t be resolved through minor tinkering,” he said. “The problem posed by the federal budget deficit not at its current level but on this trajectory… poses a growing risk to the recovery.”
[…]
In addition, the debt held by the public with current tax policies extended would soar to 90% of GDP by 2020, Mr. Elmendorf said, making the U.S. public debt load one of the world’s highest.

“The U.S. is entering unfamiliar territory in its level of public debt,” said Mr. Elmendorf. “It will be larger over the next decade than it’s been in half a century… and also unfamiliar by the standards of other developed countries.” The choice is not whether to change course from current policy, he noted, but “how quickly and in what way.” President Barack Obama has already declared a spending freeze on discretionary, nonessential outlays, but that only amounts to roughly 17% of total spending. Much of the rest of federal spending is for entitlement programs including Social Security, Medicare and Medicaid, defense spending and interest payments on the federal debt.

The size of U.S. entitlement programs has grown sharply since 1970, from 3.8% of GDP to 8.2% as of 2007, and is expected to hit 11.1% of GDP by 2020 thanks to an aging population of Baby Boomers and fewer workers in the system to help pay for their benefits.

Former Comptroller General David Walker lays it on the line:

“Let’s say our government continues to take in about the same level of historical revenues, but we hold discretionary spending to 2008 levels as a percentage of the economy, and we don’t expand health care or other entitlements any further. That sounds pretty benign, but it’s actually a disaster …. Our interest payments would become the largest single expenditure in the federal budget in about 12 years. …

The bigger the bill we pass on to our children, the bleaker the future we will bequeath to them. …

Right now, on average, Americans pay about 21 percent of their income in federal taxes and another 10 percent to state and local governments. By 2030, to pay our rising bills, that amount could be at least 45 percent–higher even than the average 42 percent that most Europeans pay. …

With reductions in disposable income like that, the children born in 2000 will inherit a much different kind of America in 2030. So much of their money will be devoted to keeping the government afloat that they’ll have relatively little for everything else in life. Their homes will be smaller and drabber. There will have less to spend for cars, vacations, dinners out, and big TV sets. …

And America as we know it will cease to exist. There’s no telling what would happen next because the idea of an America where nearly half of a persons income goes to the state is something that we’ve never faced before, and which none of us can contemplate.

I’m not looking forward to it at all.

The Congressional Budget Office is out with it’s latest analysis of President Obama’s budget, and the news isn’t good at all:

President Obama’s policies would add more than $9.7 trillion to the national debt over the next decade, congressional budget analysts said Friday, including more than $2 trillion that Obama proposes to devote to extending a variety of tax cuts enacted during the Bush administration.

The 10-year outlook by the nonpartisan Congressional Budget Office is somewhat gloomier than White House projections, which found that Obama’s policies would add $8.5 trillion to the debt by 2020. While the two agencies are in relative agreement about the short-term budget picture, with both predicting a deficit of about $1.5 trillion this year and $1.3 trillion in 2011, the CBO is less optimistic about future years, predicting that deficits will grow rapidly after 2015

Under these projections, the National Debt would exceed $ 20,000,000,000,000 by 2020.

Here’s a chart to make the matter even more clear:

The Treasury has released the 2009 Financial Report Of The U.S. Government, which is full of facts, charts and figures on the fiscal health of the country. Let me tell you, if you even have the slightest understand of basic economics, this report should trouble you.

I’ve pulled a couple of the charts to give you an idea of how screwed we really are. Let me be clear in saying that I am not blaming this on the current administration. They are, however, doing nothing to deal with the problem. In fact, they are doing what previous administrations have done…building on past fiscal irresponsibility with more fiscal irresponsibility.

This first graph shows that without major policy changes, debt as a percentage of gross domestic product (GDP) will exceed 200% in the next 35 years. It gets even worse as you can see below. Part of the reason is demonstrated in the next chart.

As you can see here (click to enlarge for better detail), interest on the national debt becomes more of a problem than entitlements, which is what many fiscal conservatives often talk about. This is a financial burden that cannot be solved by simply raising taxes, because with that economic growth is put at risk.

Over the last few decades, annual government spending as a percentage of GDP has been around 20%. However, In the next 20 years, spending as a percentage of GDP will hit 30% and it will just continue to grow.

Where has this guy been and why does he care about the deficits and debt now when the Federal Reserve, which he oversees, has been an enabler to Congress and a large part of our problems in general:

With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.

Recent events in Europe, where Greece and other nations with large, unsustainable deficits like the United States are having increasing trouble selling their debt to investors, show that the U.S. is vulnerable to a sudden reversal of fortunes that would force taxpayers to pay higher interest rates on the debt, Mr. Bernanke said.

“It’s not something that is 10 years away. It affects the markets currently,” he told the House Financial Services Committee. “It is possible that bond markets will become worried about the sustainability [of yearly deficits over $1 trillion], and we may find ourselves facing higher interest rates even today.”

It’s not that Bernanke hasn’t said that the debt is a problem before, he’s just never been this direct about it. Better late than never, I guess.