In a press conference over three weeks ago on July 14th, of this year, Standard and Poor’s, one of the three major credit rating agencies, warned that if the U.S. wanted to keep its “AAA” credit rating, Congress and the Administration would have to agree to trim at least $4 trillion from the present $15 trillion U.S. deficit.
The best politicians could do is come up with a vague agreement to enact spending cuts in the future. This agreement fell far short of what must be done to address the U.S. deficit. So, last Friday, after business as usual in Washington, S&P downgraded U.S. Credit risk from the “AAA” that the country had enjoyed for 70 years, to “AA+”.
– The downgrade will eventually lead to higher borrowing rates and costs to finance U.S. debt for American Taxpayers.
– The greatest fear is that the downgrade will most likely depress the fragile economic recovery.
– The downgrade could also heighten the possibility of a Double-Dip Recession.
What does the Budget Control Act Do?
– The legislation raises the ceiling on U.S. debt by $2 trillion dollars, which enables the government to continue to operate for another 18 months. It also requires $2.4 trillion in future debt reduction over a 10-year period.
– Of the $2.4 trillion, $917 billion is required to be cut from “planned” discretionary spending (excluding programs like Social Security, Medicare and Medicaid). What is already planned is huge increases in expenditures, which means that deficit will continue unrestrained even with the savings.
– The remaining $1.5 trillion in cuts has not been identified. These cuts will be determined by a joint committee of 6 republicans and 6 democrats. And, let’s face it the congressional record in resolving these issues so far, has been dismal. If the 12 members don’t agree, there will be $1.2 trillion in across the board cuts to all federally funded programs.
What’s The Problem
– Most of the cuts don’t take effect until 2017, when many of the politicians now in office, including the President, are gone. Future office-holders may not feel compelled to adhere to this legislation.
– The reduction in expenses during 2012, is just 2.3% of the planned cut, or $21 billion. (This is sort of like wanting to lose weight. Continue to eat as much as you want now, and start a diet that never happens, tomorrow. You’ve really committed to nothing!)
– According to the Congressional Budget Office, the deficit for the 2011 budget is $3.6 trillion. This is an increase from 2010 of $173 billion, or 5% year-over-year.
– The CBO projects that U.S. debt will continue to grow faster that Gross Domestic Product, or GDP rate. These projections indicate that by 2021, the federal debt will increase from 69% of GDP, to 101%. How does this compare to the present European debt crisis? Italy is being rescued by the European Union because Italian debt is presently at 100% of Italian GDP, while Greece has required a full-scale bail-out because its debt is at 150%.
– Also consider that of the $15 trillion deficit the U.S. presently has, only $10.4 trillion is held by the Public. The remaining $4 trillion is money owed for social security payments made that have been taken by the federal government and replaced with “IOU’s” that are not secured by any assets the government can sell.
After review of where the U.S. deficit is heading, without major reform, and the minimal efforts made under the recently enacted Budget Control Act of 2011, it’s much easier to understand why U.S. debt was downgraded by S & P. A great deal more has to be done by Congress and the Administration to avert the almost inevitable disaster that awaits the U.S. financial standing.