A little over a month ago markets lost $1 trillion in value in one day. This was not, as some might say, the result of Wall Street CEOs being greedy, or irresponsible borrowing, or Goldman Sachs or really any of the old favorites. In fact, it was not the work of our financial sector at all. It was August 6, immediately following Standard and Poor’s downgrading of the United States’ debt from AAA to AA+. The credit rating of any financial entity (countries included) is a measurement of how likely the entity is to default on their credit payments. The primary return for the increased risk of a AA+ rating over a AAA rating is a higher interest rate on borrowed money, which can be a significant amount when you are borrowing billions of dollars a year. The downgrade was not the result of some kind of economic failure, nor did S&P suddenly realize that the U.S. is broke – $14 trillion in debt with growing budget deficits every year – but not broke. Instead, the reason cited was fear that Washington lacked the political capital to pay its debt. It was not that Washington lacked the ability, or that a default was even likely, it was merely a question of whether we will choose to say yes or no.
The week preceding the downgrade was marked by a substantial amount of grand-standing on new budget deals. On one hand there were those, including Representative Bachmann (R-Mn), a current Republican presidential candidate, who absolutely refused to raise the debt ceiling despite the simple fact that even without taking on any more obligations, our current budget would have forced the U.S. into default. There were others, such as Representative Sheila Jackson (D-Tex), who couldn’t see any reason why this debt ceiling deal should be any different than the past. Jackson said, “What is different about this president that should put him in a position that he should not receive the same kind of respectful treatment of when it is necessary to raise the debt limit in order to pay our bills…?” Now aside from the fact that her statement was meant to imply that the 112th Congress is a bunch of racists, she brings up an important point: What is different this time? As surprising as it may be, the original debt limit was not set at anywhere close to $13 trillion; we had to raise it a few dozen times to reach that level. So what is different about this time? I think a lot of people have figured it out already: not much is different, except that at some point, maybe around the time that the word “trillion” becomes associated with the word “dollar,” you just can’t keep accruing more debt. I’m sorry Miss Jackson, it’s not because President Obama is black, it’s because he is expensive.
Here is where S&P came in. The debt ceiling was raised and a new deal was struck – not what either side wanted - but it had to happen. Americans everywhere hoped that the agreement would avoid a downgrade, but alas, their hopes were in vain. Now we have to ask ourselves: Why didn’t this deal avoid the downgrade like it was supposed to? Well, how about we just look at what took place. First of all, and most importantly, we can still finance our government. Second, however, is the fact that when we were talking about costs in the trillions, we ended up making less than $100 billion in cuts, less than 10 percent of what we are adding to our debt every year! Finally, our ultimate solution was to create a budget “super committee” in order to find more items to cut. Then S&P decided that we lacked the political capital to find any of those cuts. Following that insult, our congress responded by increasing our deficit by another half trillion dollars! Don’t worry, though, it’s OK, our “super committee” will find something to cut. In the face of such brilliance I don’t see how anyone would think that we lacked the political capital for anything.
Nonetheless, the fact is that however bleak the previous scenario may seem, AA+ is still a pretty good rating. It is not what you would expect from the only nation in the world who can print its own money to pay its debt, but AA+ is still not too bad. In addition, it wasn’t long ago that our nation ran a budget surplus; we were still in debt and our economy was in far better shape, but it is not impossible for us to eventually stop accruing debt. The difference is that this time, if we ever see a surplus again, it should not be a sign that government needs to spend more, it is merely a sign that we are headed in the right direction.
By Mark Davis