The next Obama downgrade
One of the frightening things about having Barack Obama in the White House, at a moment of profound fiscal crisis, is that he either doesn’t know what he’s talking about, or he’s constantly lying to the American people. Take his novel effort to turn the threat of future credit downgrades into something fiscally responsible people are causing, by insisting on restraint in government spending.
At his press conference on Monday, the President said this:
Republicans in Congress have two choices here: They can act responsibly and pay America’s bills or they can act irresponsibly and put America through another economic crisis.
But they will not collect a ransom in exchange for not crashing the American economy. The financial well-being of the American people is not leverage to be used. The full faith and credit of the United States of America is not a bargaining chip.
And they’d better choose quickly because time is running short. The last time Republicans in Congress even flirted with this idea, our triple-A credit rating was downgraded for the first time in our history, our businesses created the fewest jobs of any month in nearly the past three years, and ironically, the whole fiasco actually added to the deficit.
(Emphasis mine.) Anyone who thought Obama’s re-election would finally compel him to stop blaming other people for his failures must be profoundly disappointed.
This is a dangerous misrepresentation of America’s position. The credit rating agencies don’t enjoy watching high-profile fiscal crises – it makes their analysts and investors nervous – but they view these political dust-ups as a symptom of the problem. To put it simply, they’re worried about America repeatedly slamming into the debt ceiling, not the existence of the debt ceiling.
Fitch Ratings was perfectly clear about this on Tuesday, as quoted by CNN: “”In the absence of an agreed and credible medium-term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. public finances, the current negative outlook on the ‘AAA’ rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted.”
It’s true that Fitch analysts don’t like debt ceiling showdowns, calling them “an ineffective and potentially dangerous mechanism for enforcing fiscal discipline.” But that doesn’t mean they think fiscal discipline is bad, as Obama would have it. They want to see a politically stable government matching its spending commitments to revenue. And they understand that revenue can only be sustained at a certain percentage of national output – nobody wants to buy debt from a country bent on taxing itself into economic stasis.
Here is what Standard & Poor’s said, when they downgraded U.S. debt in August 2011 from AAA to AA+: “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics. More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”
Not only did Standard & Poor’s lower America’s credit rating, but they declared a “negative outlook,” and said they might reduce our rating again within two years, “if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.”
Obama can spin political fantasies until the cows come home, and Uncle Sam’s creditors seize the cows, but the simple truth is that America’s credit rating is a reflection of its ability to honor its debt commitments. That is not at all the same thing as its ability to honor spending commitments made by irresponsible liberals to their favored constituencies… but as the amount of money borrowed by the federal government to pay for that stuff increases, the risk of a future crisis grows.
There is always the risk that a cash-desperate government might decide not to pay its debts. Who could “force” the United States to pay up? The point of crisis comes when the hunger of government dependents for their lollipops and bailouts leads politicians to decide cutting benefits and laying off government employees is more painful than stiffing creditors. If you think it looks bad now, try fast-forwarding a few years until debt service begins crowding out mandatory entitlement spending, while discretionary spending (in other words, just about everything filling the headlines today, including national defense) becomes an afterthought. The time remaining until that moment of absolute collapse arrives is better measured in years than decades.
But we’ll be in deep, deep trouble long before we reach the day when debt service devours the entire federal budget. Another one of those pesky credit rating agencies Obama was talking about, Moody’s, says that a serious rating downgrade is all but inescapable when interest payments equal 20 percent of federal revenue. In 2010, they predicted that limit would be hit somewhere between 2018 and 2020. Funny how President Obama didn’t mention that when he was pointing fingers of blame at the financially sane, isn’t it?
Or look at it this way: our existing mountain of $16 trillion in debt is huge, it costs billions of dollars to finance every month, and there is no serious talk in Washington of reducing it. That would require running budget surpluses, but we have heated arguments about how reducing the deficit by more than 15 percent is unthinkable. It is not difficult to imagine a day when the pressure of Washington’s other spending commitments – particularly those mandatory “entitlements” – makes payment of the debt interest appear less than “mandatory” to desperate politicians. That would be true even if we began requiring balanced budgets this year, and never increased our total debt by another dollar.
What really doesn’t help our credit outlook is people like Barack Obama explicitly threatening to default on debt payments, halt Social Security checks, or suspend military payroll. Also unhelpful: floating executive power grabs, magic coin tricks, and paperwork shuffles as methods of disabling what little fiscal discipline currently exists. Such behavior is unworthy of the President of the United States, and our creditors are justified in feeling queasy about the character of a nation that conducts its affairs this way.