The secretary of the Treasury, Timothy Geithner, was asked whether persistent deficits put the United States in danger of losing its AAA credit rating. “Absolutely not,” he said. “That will never happen to this country.”
– Feb. 7, 2010
Treasury Secretary Tim Geithner said Tuesday there is “no risk” the U.S. will lose its top credit rating amid a new analysis that revised its outlook on American debt to “negative.”
– April 19, 2011
We have lowered our long-term sovereign credit rating on the United States of America to “AA+” from “AAA.” … The outlook on the long-term rating is negative. We could lower the long-term rating to “AA” within the next 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.
– Standards & Poor’s, Aug. 5, 2011
Over the last two months, numerous political commentators, as well as leading Democrats and Republicans, have vehemently insisted that a deal on the debt ceiling was necessary to avoid debt default and credit downgrades. Unsurprisingly, these happened to be the same commentators and politicians who did not see the crisis of 2008 coming and who have swallowed whole the ludicrous claim of “economic recovery” still being pushed by the Federal Reserve and the Bureau of Economic Analysis.
And once more, all of these public Panglosses have been proven wrong by events. This time, however, it took only three days to demonstrate their observable incompetence. The downgrade of U.S. credit was inevitable because the salient issue was never the debt ceiling or the inability of the federal government to borrow more money, but rather, the fact that it was already borrowing too much.
There are three important aspects to S&P’s decision to reduce the U.S. sovereign credit rating. The first is to note that despite Democratic claims to the contrary, it was not insufficiently high taxes that have led to the credit downgrade. While Standard & Poor’s claims to take no position on the mix of spending and revenue measures, they do specifically mention “less reduction in spending than agreed to” as being a potential problem while anticipating that the U.S. debt-to-GDP ratio will continue to rise from 74 percent to 85 percent. This is a clear indication that the ratings agencies have little confidence that the announced reductions in the rate of spending increases will actually take place.
The second significant aspect is the projected rate of economic growth in S&P’s revised base case and downside case scenarios. The base case assumes a trend of “real GDP growth of 3 percent” while the downside case assumes GDP growth of 2.5 percent. Both of these cases are too optimistic; the first quarter GDP report was recently revised downward to 0.4 percent and the more reliable economic indicators, such as total debt and the employment-population ratio, point to outright GDP contraction rather than growth. While this will be widely reported as a “double-dip recession,” it is actually the continuation of the worldwide depression that began in 2008.
The third aspect is the negative long-term outlook. S&P declared that a higher public debt trajectory than presently assumed could lead it to further lower the long-term rating. Unless the ongoing credit contraction in the household and finance sectors has already turned, the federal government will find itself in a catch-22 situation. If it continues to expand its own debt to make up for the private contraction – as it has done for the last 11 quarters – then the debt will rise and the debt-to-GDP ratio will increase. If it stops increasing its debt at the present rate of $1.5 trillion per year, GDP will fall and the debt-to-GDP ratio will increase. A positive solution is simply out of Washington’s hands now. Picking its poison is the only available option.
Neither Democrats nor Republicans should be taken seriously in their attempts to assign responsibility for the U.S. debt downgrade to the other party. The Republican speaker of the House who convinced most of the tea-party Republicans to abandon their commitment to fiscal responsibility, John Boehner, is every bit as culpable for the downgrade as Obama or the Democratic Senate majority leader. Because both Democrats and Republicans created this economic disaster, it makes no sense to imagine that they can successfully lead America out of it.