Tuesday, July 26, 2011

You Can't Keep An Excellent Triple-A Rating By Going Deeper Into Debt

If you listen to all the arguments about raising the debt ceiling, some on the left claim that we could jeopardize our "AAA" credit rating if we don't raise the debt ceiling and, as a consequence, allow the country to default on its debt obligations. However, this is a canard, for pure political reasons, to push us to raise spending levels and not make any significant cuts to existing Federal programs.

The fact is that there are enough revenues, without raising the debt ceiling, to pay all our debts as well as support many of our current, operational obligations such as Social Security and military pay. Revenues this year will top $2.1 trillion dollars. That's about $172 billion in revenues per month while, at the same time, the interest on our debt will average about $42 billion a month; leaving $130 billion in revenue to support much of the other, essential businesses of our government. Of course, this fact does leave about $144 billion a month in other unfunded operational costs. But, we could survive, month-to-month, without default on our debt and without suffering a ratings downgrade for that very reason.

But, the real jeopardizing fact with regard to our credit rating is the amount of debt, itself. Even if we get a debt ceiling increase, the rating agencies may still lower our rating by virtue of the amount of debt that we continue to accumulate versus any real potential for revenues increases. The left would argue that simply raising taxes would solve this supposed "revenue" issue. But, as had been pointed out many times, even if you completely taxed away every penny being earned by the so-called rich, we would still fall well short of the revenues needed to make any real dent in our total debt. A debt that now sits at $14.5 trillion and rising. The only real solution is austerity through program cuts.

The real reason for the threats to downgrade America's excellent rating is that Federal spending has increased by 30% under Obama. When Bush left office, spending was at about $2.9 trillion dollars. Today, the annual Federal spending level is at $3.8 trillion; or, about $900 billion more than when Bush left. What's worse, and for all his talk of fiscal restraint, in February, Obama submitted a 10-year budget outlook whereby he would take us from the current $3.8 trillion annual spending to nearly $6 trillion in annual spending in just 10 short years. Then, through some rather generous assumptions on the economy and taxes, Obama projected that the Federal deficit would remain the same over that same 10-year period. Seen as a true fairytale, his budget submission was totally rejected by the Senate on a completely bipartisan basis; 97 to zip.

Our credit rating is in jeopardy because we can't keep raising spending levels at a rate faster than our revenues increase. In the throws of a deep recession and, subsequently, declining revenues, Obama jacked up spending by 30% in some false assumption that all that increased spending would stimulate the economy. But, the economy continues to flounder and unemployment levels continue to rise; raising the specter that revenues may continue to fall with our debt levels continuing to rise at an ever increasing rate. Our credit rating is no different than a personal credit score. If a person continues to keep spending themselves into hock, their credit score will go down; making it very difficult to borrow or obtain a loan at the best rates. And, that's exactly what will happen to the U.S. government if we continue to spend and borrow.

So, the bottom line is that we need to raise the debt ceiling in order to keep the current level of government operations running. But, in order to satisfy the rating agencies, we need to show that we, as a country, are prepared to make significant cuts in spending to reverse the massive debt accumulation. As far as raising taxes goes, this just might have to happen; but, the revenues from any tax increases should be matched at a rate twice that amount with substantial and realistic spending cuts. Only then, can we assume that we will avoid a ratings downgrade.

1 comment:

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