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
Yeah, when I read that I was thinking, “Turbo Tax Timmy was in the room, and has gotten his boys to repeat the threat to give his boss more ammo.”
Pathetic. It’s too easy to see through these thug tactics. The press printing it with relish, certain to fool us rubes with their “transparent” propaganda.
But I say to Boehner, Canter, and ESPECIALLY McConnell:
Hold that line! The S&P, Moody’s, will do what they will do – what they would have done regardless.
Don’t blink. Don’t flinch. Don’t cave.
Hold that line!
Have you thought this through? What happens if (when) no deal is reached? Sure Obama and Geithner are exaggerating. Of course debt payments, social security, military pay, and lots of other things could be paid. But the fact that spending would have to be cut by 40% or more very quickly is inescapable. And Obama would be in charge of doing that. You know he would do it in such a way as to cause maximum pain to the electorate and then blame the Republicans. He would have the full support of the press in this endeavor. He would also blame the Republicans for any bad economic news that arises in the future.
All of this would ensure Obama’s reelection, which would be a disaster for the country. The best hope of saving the country is McConnell’s plan. It does nothing to help the deficit or economy now, but it gives Obama complete ownership of both. That will prevent his reelection.
Don’t underestimate the inherent squishiness of the GOP. A couple more BO temper tantrums mixed with ZOMG!#$@~$ headlines at the WaPo and NYT and topped with more surrender from Lindsey Graham, etc. and the Rs will give up the ghost on the whole enchilada.
[…] NOT THE DEBT CEILING, SAYS PROF. JACOBSON: We already were headed for a downgrade because of too much, not too little, debt. “Both Moody’s and S&P have been warning for months about possible downgrades unless […]
Woot woot, Professor! InstaLanche! Kudos!!
I would have thought that a failure to increase the debt limit would be considered a positive sign by any serious ratings agency. It would be an “oh, look, they’re finally getting serious about the deficit” moment.
Conversely, had O done anything along the lines of unilaterally (and illegally) arranging for borrowing above the limit, or if he reacted to a “no” vote by stopping Social Security checks while continuing his payments to his union friends, THEN a truly serious economic/fiscal rating service would start downgrading, reasoning that a country at civil war is not a good debtor.
I think Moody’s owes Obama big for dropping this investigation:
http://www.information-age.com/channels/development-and-integration/news/1279158/investigation-into-moodys-rating-glitch-dropped.thtml
we have some political payback going on.
Moody’s Places 7,000 Municipal Ratings Tied to U.S. on Downgrade Review
Bloomberg
Chinese ratings agency takes on the United States (again)
“In the coming three to six months, if there is no major event to make real improvement in the fiscal situation in the United States, we will definitely downgrade the U.S. sovereign rating,” Guan told Reuters in an interview on Thursday.”
Reuters
“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.”
Look at what they are blaming, the Bush tax cuts and the new Congress.
William A. Jacobson: 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.
Deficits are a problem over the medium term, but in the immediate term, not raising the debt limit would lead to an immediate downgrade.
bobby b: I would have thought that a failure to increase the debt limit would be considered a positive sign by any serious ratings agency. It would be an “oh, look, they’re finally getting serious about the deficit” moment.
Absolutely not. Incurring obligations, then not paying them is called default.
I wonder why Moody’s called them the Bush tax cuts when they are the tax rates Obama negotiated in December?
Makes me wonder if somebody in the administration gave Moody’s a friendly call suggesting now might be a good time to publish this report.
Zachriel have you any clue what you’re talking about? Who said anything about not paying debts? The treasury will take in an estimated $172B in August, and interest on our debt will cost about $20B. I fail to see anything in that about any default, so it must be that you’re using threat of ‘default’ on our debt as some kind of cheap political tool.
Moody’s is clearly racist.
The easiest way to reign in out-of-control federal spending is to allow this cap to go into effect. Republicans should champion it, and they should show up on talk shows saying stuff like “What is IRRESPONSIBLE is allowing our debt to increase past $14.5 trillion dollars, it’s already out of control, this cap will ensure some fiscal sanity.” This would hang our enormous debt around the necks of democrats. Let them own it. The last Rasmusen poll showed that 68% of people don’t want the debt limit increased, they don’t want all this spending. That is an enormous majority.
What is disappointing about this whole exercise is that the administration, the Democrats and the Republicans have not come forward with a plan, based on projected growth rates which are realistic, that results in the budget being balanced within the next four years, with subsequent surpluses being used to start to pay down the national debt.
To do this requires tax code reform, entitlement reform, repeal of Obamacare and replacing it with market based solutions, significant cuts in discretionary spending, along with cuts in defense spending.
This is what is required to ultimately avert a downgrade.
What should the Republicans do?
Stake out a position which calls for the budget to be balanced within the next four years, with budget surpluses after that date to be used to start paying down the national debt.
The Republicans should inform the President that if the parties can not reach agreement in time before August 2, 2011, so be it.
The debt ceiling will not be raised, so requiring the administration to prioritize spending so that debt, national security and existing social safety net obligations are met, with the rest of the government being shut down.
While this is going on, the parties can continue to negotiate and work through the details of a plan to meet the stated objectives.
If the parties can not agree, well that is why there are elections. In the meantime, no new debt is being incurred, so avoiding a downgrade.
quiznilo: Zachriel have you any clue what you’re talking about? Who said anything about not paying debts? The treasury will take in an estimated $172B in August, and interest on our debt will cost about $20B. I fail to see anything in that about any default, so it must be that you’re using threat of ‘default’ on our debt as some kind of cheap political tool.
Because once the U.S. has legally contracted or obligated itself to make payments, whether to contractors or to Social Security beneficiaries, they are obliglated to pay them. Of course, they should pay the interest first, but that doesn’t mean they haven’t defaulted on their other obligations.
There’s more than enough coming in to pay the interest, and all contractual obligation and SocSec (which is neither).
Zachriel you’re actually going to claim that not redistributing wealth, for whatever reason, is ‘defaulting’ on our promises? You, sir, have invented a new definition of ‘default’. This is typical for liberals to invent new definitions for words.
Did you have a problem with ‘defaulting’ when you and your buds tried to defund the Iraq war effort? Would it be a ‘default’ to cut military expenditures now, so you can send more money to your socialist projects? Are you going to hold generations yet unborn hostage to your ‘default’ on $14.5 trillion worth of rediculous promises by idiot democrat politicians?
If that is your definition of ‘default’ lets start defaulting today, everywhere, and you can take your insane deficit and shove it!
Milhouse: There’s more than enough coming in to pay the interest, and all contractual obligation and SocSec (which is neither).
Don’t suppose you might want to pay the military, many of whom are fighting overseas, or federal law enforcement, for that matter. Or the Center for Disease Control.
Here’s an analysis from the Bipartisan Policy Center:
http://www.bipartisanpolicy.org/sites/default/files/Debt%20Ceiling%20Analysis%20FINAL_0.pdf
You’d be surprised by the unintended consequences. In Wisconcin, a government shutdown has resulted in them running out of beer!
quiznilo: Zachriel you’re actually going to claim that not redistributing wealth, for whatever reason, is ‘defaulting’ on our promises?
If Congress passes a law that provides a monthly check to the elderly or veterans, then the law requires that payment. It’s an obligation. The problem comes when Congress passes conflicting laws, such as requiring payments, but not providing sufficient funds.
quiznilo: Did you have a problem with ‘defaulting’ when you and your buds tried to defund the Iraq war effort? Would it be a ‘default’ to cut military expenditures now, so you can send more money to your socialist projects?
Are you talking to someone else? In any case, Congress can provide or not provide funding. That’s the legislative prerogative.
quiznilo: Are you going to hold generations yet unborn hostage to your ‘default’ on $14.5 trillion worth of rediculous promises by idiot democrat politicians?
The markets will hold them responsible. The U.S. is the world’s largest economy, and engages in a huge amount of international trade, hence, it has the most to gain and the most to lose.
“The markets will hold them responsible.” you would think that the markets would respond well to some budgetary sanity for a change. You *do* understand that it’s uncertainty regarding government overspending that is supressing economic activity, and not the risk that the government might not be able to give Planned Parenthood $500 billion. Businesses know that sooner or later we’re going to have to correct, and it will be painful, but the longer we wait, the worse it will be.
“If Congress passes a law that provides a monthly check to the elderly or veterans, then the law requires that payment.”
And if wishes were horses, I’d be well fed. What part of WE HAVE NO MORE MONEY is so hard to grasp? Congressional laws cannot change natures laws, we cannot legislate that up is really down no matter how many closed-door sessions Nancy Pelosi holds. August will see hopefully $172B in treasury revenues, do you understand how vast this sum is?
I wouldn’t be surprised if you still fail to see reason but it’s time to bring in adults to Washington to fix the problem. Pretending that it doesn’t exist is not a solution. We will not allow you to plunder America any longer.
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.
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.
“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.
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 […]
[…] 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 problem. But according to Democrat Socialist, Barbara Lee, our […]