The US government has dug itself into a debt canyon, and it won't or doesn't know how to stop digging.
While Congress and the Executive Branch of Barack Obama continue to bicker over steps to take in the face of mounting national debts, a third party has revised its outlook on the US government's long-term debt rating to Negative from Stable. In a report, Standard & Poor’s said the US has “what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us.”
There's more. If you don't mind plodding through, click here for the full report. Here's how Standard & Poor's describe the situation it sees:
- We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.
Before I express my personal view on US indebtedness, let me vent first about the shoddy job Standard & Poor's and other sovereign debt rating firms are doing. Total US public debt is in May expected to exceed the borrowing limit of $14.29 trillion sanctioned by Congress. Our government owes more than $14 trillion, and the deficit is as large as the ocean, Standard & Poor's confirmed. The firm noted that US deficit in 2009 “ballooned to more than 11 percent [of GDP] and has yet to recover,” from between 2 percent and 5 percent of GDP in 2003. Yet, Standard & Poor's is still waiting for the red light to start flashing before downgrading the US credit rating.
What exactly needs to happen before rating agencies serve a stronger warning to the United States government about the price of rising indebtedness? Do we have to become Greece, Ireland, Portugal, or Spain before it become obvious something is seriously wrong here? I know many people continue to argue that debts don't matter. If it doesn't, why is Standard & Poor's hollering now, and why are several European nations groveling before creditors?
The US is in a jam, and rating agencies do a major disservice to countries that are heavily weighed down with debts — and that keep piling them on. In its report, Standard & Poor's sweetened its warning with some caveats about how the US is such a different nation compared with others similarly struggling with high long-term debts and budget deficits.
The US has unique strengths, according to Standard & Poor's. It said further:
- We have affirmed our 'AAA/a-1+' sovereign credit ratings on the United States of America
- The economy of the US is flexible and highly diversified, the country's effective monetary policies have supported output growth while containing inflationary pressures, and a consistent global preference for the US dollar over all other currencies gives the country unique external liquidity.
This doesn't sound alarming, and we shouldn't be worrying, right? No. “Although we believe these strengths currently outweigh what we consider to be the US's meaningful economic and fiscal risks and large external debtor position, we now believe that they might not fully offset the credit risks over the next two years at the 'AAA' level,” according to Standard & Poor's credit analyst, Nikola G. Swann.
So, which position should we accept? Is the United States in top condition, poor condition, or somewhere in between? As far as Standard & Poor's is concerned, the US government needs to do something about its current outsized deficits and ballooning long-term debts by 2013 or it will face… what exactly? I expect it will face higher borrowing costs in the short-term and dire unknown consequences in the future.
That's what Standard & Poor's should be concerned about, because everyone knows that despite all the huffing and puffing in Congress, nothing will be done in a mere two years to noticeably slash deficits or pay off even a nickel of the country's long-term debt. The US is currently not paying down much, if any, of its current debts; we are only servicing these by borrowing more to pay off the interest.
As previously noted, Congress must by the middle of May raise the debt ceiling to ensure the US government does not for the first time in its history default on payments of accrued interests. The debt ceiling will be raised, again. And it will be raised again and again in future years because of continuing disagreements over certain issues, including whether debts matter (they do but that's, of course, my opinion); whether the country can afford to cut spending at a time of high unemployment and slow economic growth; and exactly how to fill the debt hole — tax hike or a sharp reduction in spending that would involve the extensive reduction in payouts to major entitlement programs, including Social Security and Medicare/Medicaid.
I can't dig deeply here into why this matters to businesses, but high-tech companies that have ignored the issues of rising deficit financing and stretched out long-term debts in the US may one day rue their lack of attention to this problem. The stock market dipped after Standard & Poor's released its report. At the end of trading on Monday, April 18, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite each fell 1 percent for the day.
That's an ominous warning. The publicly traded companies that make up these indices all caved under pressure from events totally unrelated to their individual operations. The Standard & Poor's threat was a very lame one in my opinion, and yet stocks swooned. Imagine what would happen if Standard & Poor's actually followed through on its threat, or even better/worse, what if the firm actually did what it was supposed to do — take its blinkers off and tells the US government its credit rating must go down several notches?