Economy & Budget

Obama Risking Our AAA Rating

The NCAA brackets have narrowed, the Easter congressional recess approaches and the hyper-liberal government of President Obama, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid continues to perform with the self-destructive efficiency of a Chernobyl reactor. 

But, as the Rev. Jeremiah Wright might say, the chickens are coming home to roost. 

A Triple-A bond rating is the highest a company (or a country) can earn on its credit. If you are rated AAA, you can borrow at lower interest rates than the market demands of higher-risk debtors. A new report says that the United States may soon lose the AAA rating. 

America’s debt — which we refer to as the federal deficit — has been rated AAA for time beyond memory. Since the turn of the last century, the American economy has been the engine that has driven and defended freedom around the world. Without it, Franklin Roosevelt could never have built the “arsenal of democracy” that enabled great armies to defeat what was the greatest threat to civilization since the fall of Rome.

And in the years since, the American economy — based on the free market capitalism that powers freedom of imagination, investment and technological advancement — defeated the Soviet Union.  

Now our economy is under attack by Osama bin Laden and his ilk, who understand that they can defeat America only if they destroy its economy. Remember, Bin Laden’s stated goal even before 9-11 was to attack our economy. That remains the main goal of him and his allies.

What bin Laden seeks to do, the liberals are doing to us more quickly and decisively than he can. If the American economic party is over, on what other basis can freedom be defended?

Moody’s Investors Service — the primary source of ratings on which the world’s financiers rely — says that the United States and the United Kingdom are on the verge of losing the AAA rating. 

So may France and Germany. But their economies are quasi-Socialist and their decline is predictable. In 2010 we expect France to look like the aging Gina Lollobrigida while America is still as young and fresh as Hilary Duff. But Moody’s is looking and it doesn’t see Duff: It sees Joan Rivers. 

Why? It’s unfortunately simple: The federal deficit has grown so high (which is most important to Moody’s) that U.S. interest payments on its debt — in a ratio to the revenue the U.S. collects in taxes — are higher than those of any other top-rated nation with one exception: the U.K.

How have we come to this sorry pass? Yes, George Bush spent far too much and proved that the term “big-government conservative” is an oxymoron. But Barack Obama has spent like no one has before. And America can’t afford it. 

As the Wall Street Journal reported back in January, the Obama budget will end up borrowing $3.7 trillion in the first three years of his presidency. This is more than the accumulated debt in the first 225 years of American history.

And our debt is growing as a percentage of Gross Domestic Product while revenues collected are shrinking in relation to GDP. (There is a small dip in debt as percentage of GDP this year resulting from the repayment of TARP monies by the banks.)

What’s clearly coming—unless we execute a massive course change quickly—is a downward economic spiral. The more we borrow, the more interest we pay on the debt. And we’re a path leading to interest payments that alone will soon exceed major portions of the federal budget. 

For just one month—February 2010—the deficit totaled $220.9 billion, 14% higher than the previous record set in February of last year. The increase tin the federal deficit from January through May 2010 equals $651.6 billion, 10.5% higher than a year ago. 
According to the Congressional Budget Office, (again as the Journal reported), the interest payments on the federal deficit will be greater than the spending on education, road building and all other non-defense discretionary budget items.

If America is downgraded below Moody’s AAA rating, what will happen? First and foremost, the interest we pay on the deficit will rise. The more we borrow, the less able we are to repay the debt and future borrowing — and America borrows at least monthly and sometimes more often — will have to be paid for at higher interest rates. Which means the ratio of interest payments to revenue will worsen. Which will cause further increases in the interest rate, and so on.
 
Revenues — taxes — will rise next year. Or at least that’s the theory. The Bush tax cuts will expire at the end of 2010 and income, capital gains and estate taxes will rise. But will that raise revenues, or will the tax hikes result in decreased revenue?

History — and the Laffer Curve — must be our guides. They tell us that America’s tax revenue will probably increase briefly until employers and investors adjust to the higher new taxes. And then revenues will begin to fall because less money will be collected as businesses and individuals will be doing their best to avoid taxation. 

Moody’s report said, “Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.” 

What that means is that no matter how much President Obama spends on more government “stimulation” on the economy, as soon as America passes the point at which our deficit is unaffordable, the less the possibility that our economy will recover. Ever.

In his January State of the Union address, President Obama promised he would refocus on the economy and help it create jobs. Instead, he has added the two months since to the six months he spent last year in the needless healthcare debate. And now, to buy support for Obamacare’s passage, he is promising “immigration reform” — i.e., amnesty — to cement Hispanic support for the healthcare bill and adding whatever other promises may be needed to nationalize our healthcare system. 

Obama will not be the salvation of our economy. But he may preside at its funeral.

Republicans seem too enmeshed in the healthcare debate to do much else. But they dare not ignore the basic questions of tax hikes and job creation. If they do and the inevitable economic downturn happens next year, voters will hold them just as accountable as they do the Democrats. 

And the Republicans dare not forget that not only will the Bush tax cuts expire next year, Obama’s healthcare plan has a bunch of new taxes in it. More tax, less revenue, less ability to repay. 

Republicans should be holding Tea Party rallies in each of the districts of the wavering Democrats during the recess. Every one of the Blue Dogs and the others should hear — loudly, clearly and often — that government spending has to be cut. And before we can cut it, we have to stop its growth. Obama’s healthcare plan is a very good place to start.

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