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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