Friday, August 05, 2011

The predictable downgrade

I want to take issue with this conclusion from Daniel Indiviglio in the Atlantic: "S&P downgrades the U.S. - but why?"
But S&P must be counting on more than just Republicans acting insanely enough to cause default: Democrats would have to act just as irresponsibly. After all, spending and entitlement cuts alone can easily allow the U.S. to avoid default. The agency makes this point, saying that the nation needs entitlement cuts and/or more tax revenue. S&P must assume that Democrats, like Republicans, could reach a limit of how much they'll concede and just let the U.S. economy burn on mere principle.
No. Not "and/or" - there must be entitlement cuts. Take a look at this graph from the CBO showing revenue estimates and the combination of entitlements and interest payments on the U.S. debt. Revenue is held constant at around 19-20% GDP since that's historically the high average the government has been able to take in from taxes.

A little more than a decade from now, entitlement spending will blow through the entire federal budget. So, yes, tax revenues are needed but it will not be enough to hold back the deluge of Medicare and Social Security. These must be reformed or we'll be nostalgic for the days when we had only a AA+ rating.


Anonymous said...

Standard & Poor's has been overvaluing private corporate debt for years. It was one of the three services that gave its AAA imprimatur to the toxic and criminal mortgage bundling and derivatives scams.

In unrelated financial news, a BILLION-dollar bet was placed on July 25th that the U.S. would lose its rating. Now, less than two weeks later, it will repay the investor who made the block trade tenfold.

As we know, it is illegal to use insider information to profit or manipulate the market. Congratulations to Mr. X for his totally lucky guess.

And thanks, deregulation!

Anonymous said...

Of course U.S. debt should be viewed with suspicion. The real risk isn't default, it's inflation.

When they stop fiddling with fake spending cuts or tax increases that don't produce revenue, the politicians will start the printing presses. U.S. debt holders will be paid off with worthless paper.

Another benefit of this plan - it will hit the "rich" harder than anyone else because they will be holding more worthless dollars.

Anonymous said...

Awwww, poor widdle wich darwings.