The Downgrade Debacle-Its the Entitlements Stupid!

Note: Standard and Poor's made their announcement about the downgrade of US debt on Friday night, and I didn't post yesterday on the Sabbath, so please forgive me for posting this short post on the subject two days after the downgrade.

Any Senior member of the United States government who reacted with surprise to the Standard and Poor's announcement is either lying or not very smart. The credit agency did everything but hire a marching band to circle the mall led by five guys in baseball uniforms carrying a sign saying, "We are going to downgrade you!"

Standard and Poor's was so obvious, that even this writer knew what was coming.

On July 26th I explained that Obama's final prime time speech about the budget deal was a precursor to a downgrade that he new was coming.

Now put this all together, US Government credit rating is likely to get downgraded whether we make the cuts or not, and the economy which has been slowing down since April may fall into recession, now Obama's speech yesterday makes sense.

On July 29, I posted: 

Good News, Moody's the major ratings service least likely to downgrade US debt announced:

Moody’s Investors Service said today it expects the U.S. will get to keep its Aaa credit rating, “albeit with a shift to a negative outlook,” provided Congress and the White House can work out a deal to avoid missing payments to U.S. bondholders.

It would have been much better if that announcement came from Standard and Poor's which is the credit rating service most likely to downgrade  US debt.

 Understand, these predictions are nothing special most independent commentators predicted the downgrade.  The real question is if I could figure it out why couldn't Congress and the White House make the same judgement?

Who's Fault is The Downgrade?

If you listen to Senator John "Why The Long Face" Kerry, and some of the liberal commentators, its all the Tea Party's and the GOPs fault. Their GOP equivalents blame everything on President Obama and the high spending Democrats.

The truth is they are both right and both wrong.

The reason US debt was downgraded was years of our leader's neglect of their fiduciary responsibilities. This was the fault of both major parties and all recent presidents. The fact that Barack Obama is increasing the national debt 2x as fast as Bush, doesn't negate the fact that President Bush spent too much money, nor does it negate the fact that Barack Obama is spending it even faster.  One of the reasons we are in this mess is the members of our government (mostly on the progressive side) who chose to demonize instead of rolling up their sleeves and fixing the problem.

Any suggestion that the Tea Party shares the blame for the downgrade is asinine.  There would not have been any governmental acknowledgment of  our burdensome debt if it weren't for the Tea Party movement.

Just read the words that accompanied Standard and Poor's announcement to understand why our debt was downgraded:

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.

In other words, they see government continuing the over-spending especially on entitlements and do not believe that the deal cut enough.  It is also saying that rather than sit down and work things out many in our government would rather rail against the tea party, or demonize "rich people with corporate jets" then save our economy.

Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see "Sovereign Government Rating Methodology and Assumptions," June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government's other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.

Nothing has changed except for our increasing debt and lack of confidence in America's leaders.

Standard & Poor's believes that the removal of taxes from the table has made it harder to get an agreement (they are right that its made it harder but not adding taxes is a sound policy). They also say fixing entitlements is the key to fiscal sustainability an opinion reiterated by that David Beers, global head of sovereign and international public finance ratings at S&P today on "Fox News Sunday". Beers said that governments and Congresses come and go, but spending on entitlements persistently drags U.S. debt further into the red.

"The key thing is, yes, entitlement reform is important because entitlements are the biggest component of spending, and the part of spending where the cost pressures are greatest," Beers said.

The bottom line is our credit rating fell because Standard and Poor's does not believe our leaders have the moral courage to address the key issues:

Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions," June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). 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.

And for those who say that the lack of new taxes had anything to do with the downgrade:

Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing.

Where does that leave the United States?  S&P has downgraded our debt an it takes anywhere fro 9-18 years to get back the AAA rating (if we deserve it). Six months down the road, don't be surprised if the other major ratings services follow in S&P's lead.

Short term, the stock market is going to have some really bad days starting tomorrow.  The Tel Aviv Stock exchange one of the few markets open on Sunday  registered a sharp 6.5 percent fall on Sunday directly related to the S&P downgrade. I suspect that the Asian markets will show a similar result later today.

Expect a sell off of dollars in the currency exchanges, and interest rates to rise, not only the govt's but yours and mine also. Everything from mortgages to car loans will become more expensive. And coming at the time of IMHO the beginning of another recession, this tightening of the money supply is sure to make any economic downturn even worse. The only way to rescue the economy from such a fate is to reduce taxes across the board putting more money in the hands of consumers, which would also require a legitimate look at cutting the budget and fixing our entitlement problem.


There is plenty of blame to be shared for the downgraded US debt and the inevitable economic downturn, but in the end there is one person who deserves more blame than the rest.  Much of the S&P prose hinted at the lack of fiduciary leadership shown by the US Government. There is something that is agreed to by both parties, President Obama displayed little leadership during this crisis.  That is the crux of the problem, the person who was supposed to lead, punted.


Donald Douglas at the American Power Blog has his own opinion on the Debt Downgrade Blame Game