In an unprecedented move, Standard and Poor’s credit rating agency downgraded the United States coveted AAA status to AA+ due to two major factors:
- “We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.”
- “We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.”
This indicates that Standard and Poor’s believes that Congress, in it’s current form, will be unable to reach an agreement, in the short term, to deal with the national debt.
The big question on everyone’s mind is, is this the fault of Republicans, Democrats, or the TEA party?
The truth is that each “party” had it’s role in the S&P downgrade of the United States and unless partisan politics are cast aside for the good of the nation, everyone will suffer the consequences.
The Republican and Democratic parties of the United States have “collectively” allowed the national debt to grow over the span of decades and refused to tackle the financial issues of this nation in regards to: entitlement reforms, fixing the tax code so there are no loop-holes for ANYBODY, and keeping capital gains taxes competitive with the rest of the world to entice businesses to create jobs inside the American borders. Currently, we have the highest corporate gains tax in the world, a tax code that benefits the richest and poorest of our society on the backs of the middle-class, and the promise of entitlements that are financially unsound in their current states. All perpetrated by the seniority Republicans and Democrats in Washington.
In contrast, the very first TEA party was in April of 2008 and it had it’s first impact on politics, by running in GOP sponsored political races, in the 2010 mid-term elections. The majority of TEA party politicians are freshmen/women and never held Congressional seats until January 1rst, 2011. For the past 8 months of this year, TEA party freshmen have been stating exactly what S&P stated about the United States national credit/debit ratio. It is not sustainable.
However, the TEA party is not completely blameless in regards to the credit rating drop; not by a long shot. It was the TEA party that caused a commotion over raising the debt ceiling -well- beyond the annual national Gross Domestic Product (GDP). It was the TEA party that refused the government more revenue through higher taxes, and it was the TEA party that drew the attention of the three major credit rating agencies; causing them to re-evaluate their short-term outlook.
The following is S&P’s BASE case scenario:
” Under our revised base case fiscal scenario–which we consider to be consistent with a ‘AA+’ long-term rating and a negative outlook–we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act’s revised policy settings.”
They included a BEST case scenario that includes the known expiration of the Bush cut tax extension in 2013:
Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.
As well as a WORSE case scenario:
Our revised downside scenario–which, other things being equal, we view as being consistent with a possible further downgrade to a ‘AA’ long-term rating–features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.
No matter how the credit rating agencies look at United States [net public debt burden/GDP ratio] it is on an unsustainable path. At best, 85% of GDP by 2021, at worse, 101% of GDP by the same year. All of this assumes a certain growth rate which requires stability in the private sector job market… and that just ain’t happening folks.
The White House and Democrats are clueless on how to create and keep private sector jobs. They spew rhetoric to union leaders about Republicans shipping jobs overseas, yet, they insist on having the highest tax rates in the world on businesses. Why bother operating in the United States when you can go ANYWHERE else and make more money? If your commodity is in demand, the people of the United States will buy it, regardless of manufacturer origin, and if you can offer a duplicate commodity at a cheaper price by relocating outside of the United States to avoid high tax rates; thus selling it at a lower price than competitors. Why not make it affordable to the middle and poor classes of America as well as the “rich”? Remaining competitive as a nation to attract business by offering incentives or low tax rates to business is the only tool the government (federal, state, or local) has to “create jobs”. Like it or not, this is how the REAL world functions and threats of tax increases are taken very seriously by business in regards to location.
The S&P also says:
“A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand.”
In short, it is believed that even if the results of the 2012 election change the dynamics of politics and the necessary cuts are made, the debt burden will be so high that we will face, yet, another rating drop. Why so soon? In 2014, Obamacare will require that almost 3 million Americans join the Medicare/Medicaid ranks along with those already predicted to begin using the program. As insurance carriers go out-of-business trying to compete with the government, Medicare/Medicaid (as required by law) will be the only health care available to those without insurance; causing an even bigger problem.
… and the United States credit outlook? Not good.
The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’. On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.
Both Republicans and Democrats need to take a BIG step back an read this statement carefully. Standard and Poor’s does not care how the United States assumes fiscal responsibility, it only cares that it does assume fiscal responsibility. Democrats already got $2.4 trillion to spend through 2012 and the closure of tax loopholes to the wealthy. Republicans got a “bi-partisan committee” to revue where spending cuts are achievable in entitlements and a vote on the balance budget amendment (that will likely not pass the Senate). The only Republicans achieved was enacting automatic cuts to entitlements if this “bipartisan committee” fails to act. Cuts that are inconsequential.
To this very day, seniority members of Congress are pointing the finger of blame at everyone. John Boehner was among the first to immediately blame President Obama, however, Speaker Boehner has been contributing to the problem since 1991. President Obama did not even become a Senator until 2005. Mitt Romney, in a blatantly political way, also took the time to attack the President as the culprit behind this whole crisis. Harry Reid (serving in Congress since 1987) and John Kerry (serving in Congress since 1985) are out blaming the TEA party who did not even exist until April of 2008…and in the midst of it all, the beloved Nancy Pelosi (serving in Congress since 1976) tells the press that she will make sure that whomever represents Democrats on the bipartisan committee will insist that “entitlement cuts are off the table”.
Congress needs to get it’s act together, drop the rhetoric, and work in the interest of this country’s financial security. When the S&P downgrades the United States, it is a serious matter. Moody’s and Fitch will soon follow suit, especially if no action is taken.
(You can read the S&P review here in it’s entirety)