Human Events Blog

Get ready for America’s next credit downgrade

President Obama already brought you a historic credit rating downgrade for the United States from Standard & Poor’s.  Our next downgrade from Moody’s is on tap, and coming our way next year.

The Financial Times reports that budget negotiations in 2013 will “likely determine the direction of the U.S. government’s Aaa rating.  If the ratio of federal debt to GDP doesn’t decline, they may decide to reduce America’s credit rating to Aa1.  And they’re worried that the “fiscal cliff” Obama and his party are happy to take us over, because they didn’t get to raise taxes, will “cut U.S. growth by as much as 5 percent, sending the economy into recession.”  They’re also unhappy that we’ll actually run through the new debt secured by the Budget Control Act of 2011 before the end of this year.

Standard & Poor’s is also thinking about downgrading the U.S. again, and the third big international agency, Fitch Ratings, has posted a negative outlook.  The bond market grew understandably nervous after Moody’s issued its warning.

The Financial Times quotes economist Chris Rupkey of the Bank of Tokyo-Mitsubishi warning, “First S&P and now Moody’s is threatening to lower the boom if Congress does not come up with a credible plan to bring down what the rating agencies think is reckless deficit spending with no end in sight.”  The last plan didn’t work out terribly well, what with the farcical “Super Committee” and sequestration and all.  And Congress might have called it the “Budget Control Act,” but the federal government still doesn’t actually have a budget – Senate Democrats haven’t produced one in 1,231 days.

To expand on Rupkey’s warning, there are really two separate issues here: reckless spending, and debt as a ratio of Gross Domestic Product.  Our GDP no longer justifies further lending at top-shelf rates to support our titanic debt.  The big problem with using big tax increases to reduce the debt – beyond the fact that for all its empty talk of “fairness,” the Left has no intention of distributing that tax burden fairly between all Americans – is that tax increases cause the private sector to contract, reducing GDP.

This is a particularly acute peril for an economy teetering on the brink of recession, as even Barack Obama used to admit, a long time ago.  The Obama 2012 campaign would appreciate it if you either don’t watch the video below, forget it the instant you finish watching it, or realize that Obama was just blowing meaningless smoke when he actually laughed at the notion of jacking up anyone’s taxes during a recession – much less the small business job creators directly targeted by his current fervor to tax the dickens out of anyone who reports over $200,000 per year:

What you’ll get more of, in a prospective second Obama Administration, is intransigent insistence upon ineffective and symbolic tax increases that are likely to reduce Gross Domestic Product far more than they reduce the deficit, particularly when the targeted Americans begin adjusting their economic behavior to avoid them.  Besides being bitterly unfair to the often-demonized Americans who already carry the vast bulk of the tax burden in this country, and increasing our already painful long-term unemployment problem, these tax increases would therefore fail to satisfy the formula applied by the big ratings agencies to evaluate America’s credit-worthiness.  The result would be increased costs to finance our immense national debt… which will only make Obama and the Democrats even hungrier for tax increases, to make up for the extra money bled out of the Treasury by higher interest payments.

What the world’s investors want to see is a responsible government demonstrating fiscal restraint, in the service of a robust economy with a bright future.  That’s the opposite of what Obama will show them, if he’s still running the show in 2013.  Our next round of credit downgrades will be in the bag.  The only thing Obama will do about them is huddle with his political team, to figure out a way they can be blamed on someone else.

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