This Is A Surprise?

Anyone who's been paying attention and that knows how to balance a checkbook just can't be surprised by the news that Standard & Poors, one of the world's top credit rating firms, downgraded its rating of US sovereign debt from "stable" to "negative."

A blunt warning Monday from a credit rating firm about the U.S. government's mounting debt pushed stock markets lower and intensified political divisions in Washington about how best to tackle growing deficits.

The S&P report questioned whether the White House and Republicans would be able to reach an agreement before the 2012 presidential elections on a plan to rein in deficits. "The sign of political gridlock was a key determinant in our outlook change," said John Chambers, chairman of the sovereign ratings committee at Standard & Poor's Ratings Services.

This year's budget deficit is projected to rise to between $1.5 trillion and $1.65 trillion, equal to roughly 10% of America's gross domestic product, or total economic output.

 

This is one category in which we do not want to be leading the free world. The last time the deficit was this large on a percentage basis was in 1945, when we were at the tail end of underwriting WWII.

The CBO projects total government spending to be more than $5 trillion dollars in 2020. That's 26% of projected GDP. "There is simply no realistic way the federal government will be able to raise that kind of revenue. Since 1950 the government has collected revenue above 20 percent of GDP exactly once. That was in 2000 and the percentage was 20.6." (Source.)

The obvious solution when expenses exceed income, as most of us who manage a household budget know, is to reduce expenses. I'm at a loss to understand how that simple truth eludes our congresscritters.

And then there's our national debt, which is basically the accumulation of the annual deficits.

The U.S. debt now stands at $14.219 trillion—just shy of the $14.294 trillion cap—and is expected to balloon in part because of rising costs for health care, retirement and other so-called entitlement programs, and the interest on existing debt.

While there has been a lot of focus on the so-called 'mandatory' spending portion of the budget (the entitlement programs - social security, medicare, and medicaid), an often-overlooked driver of the deficit and debt growth is interest costs for our national debt—"the bar tab for our binge."

The CBO projects that in the next 70 years, public money spent on interest will grow from 1.4 percent of GDP (or $204 billion in 2010 dollars) to almost 41.4 percent of GDP (or $27.2 trillion in 2010 dollars). In the short term, the cost of our debt will reach 3.8 percent of GDP by 2020 and 7 percent of GDP by 2030. Today spending on interest represents about a third of the cost of Social Security; in 20 years it is expected to exceed the cost of that program.

Think of it as paying interest on your credit card balance. Once that interest payment becomes unsustainable, any rational person would do whatever was necessary to pay off the balance. Of course, "rational person" leaves out the politicians and special interest groups currently fattening themselves at our expense.

To summarize: the cut in our national debt rating from "stable" to "negative"means S&P believes there is a one-in-three chance that Treasury bonds could be downgraded from their AAA rating. The consequences of that would, at a bare minimum, mean an increase in the interest rate the US would have to pay to borrow money via Treasury instruments. That in turn would increase the spending on the debt, quite possibly triggering another downgrade and locking the US government into a death spiral. 

So what can we do about all this? Stay tuned for some suggestions tomorrow...