Earlier in the week the credit rating agency, Moody’s, reignited public concerns that the U.S. government securities might face another credit downgrade this fall. Last fall S&P took unprecedented steps when it downgraded the U.S. rating from AAA to AA+, but Moody’s did not follow. Now, however, in the midst of yet another debt ceiling debate and the Fed’s announcement of indefinite QE Moody’s has issued a negative outlook on the stock. In addition, today the smaller (yet still reputable credit rating agency), Egan-Jones downgraded the U.S. credit score to AA – , which is three levels below the once assumed perfect score.
What is the cause of this flurry of credit downgrades? Well, if you were to believe House Speaker John Boehner you would be led to believe that the sequestration cuts that are set to take place at the end of the year is what is driving the pressure to downgrade. That’s right, the Speaker believes that the potential of unsustainable debt is made worse by slashing proposed increases in government spending over the next few years.
Boehner has it completely backwards. It is not the potential inability of Congress to renig on the spending cuts brought about from last year’s debt ceiling increase that is threatening the credit score. It is the very fact that Congress is already looking for ways to avoid making even these small cuts! While some have long understood that no one in Congress is willing to truly face the unsustainable levels of government spending, the credit agencies are finally catching on.
No honest, long term solutions to these ever-more-ominous debt problems are being proposed by either side of the political spectrum. Eliminating waste and fraud and other trimming along the margins is not going to have any discernible impact. Social Security payments, Medicare benefits, and interest on the $16+ trillion of national debt take up nearly 75% of the budget. So long as those are seen as untouchable, no real progress to the budget woes can be made.
Bottom Line: While many in the media are scared to death of the “fiscal cliff” at the end of the year, we face more danger in the future “monetary cliff” that is coming. As U.S. credit scores decrease, interest rates will surely begin to rise and the government will no longer be able to roll over the short term notes on which the national debt is financed at record low interest rates. The fiscal situation is a mess, but this will ultimately be the real disaster.