Here Comes Another Credit Downgrade

Standard & Poor’s downgraded the US credit rating from AAA to AA+ in August 2011, citing “‘political brinkmanship’ in the debate over the debt had made the U.S. government’s ability to manage its finances ‘less stable, less effective and less predictable’.”

Now Moody’s Investors Service is expected to lower the US credit rating as well, probably to Aa1, as it watches budget negotiations during the 2013 Congressional legislative session. If Congressional negotiations lead to policies that produce a stabilization and then downward trend in the ratio of federal debt to Gross Domestic Product (GDP), the current Aaa rating will be retained. If, however, negotiations fail to produce debt reduction policies, Moody’s is expected to lower the credit rating. A lower credit rating means that the US may have to pay higher interest rates on some of its $16 trillion in federal debt.

Moody’s currently has a “negative outlook” on the US economy. Moody’s says that maintaining the Aaa credit rating with a negative outlook into 2014 as unlikely. Maintenance would require debt stabilization involving a substantial fiscal shock, such as if the so-called “fiscal cliff” actually materialized.

The credit rating outlook, according to Moody’s, assumes an orderly process for the increase in the debt limit. The “fiscal cliff” is what economists are calling the year-end expiration of the Bush-era tax cuts, plus tax increases and spending cuts that will automatically take place (thanks to the super-committee that was part of the Budget Control Act) as part of a deal to raise the debt ceiling.

The US has lived beyond its means for years, and the payment is slowly coming due. How many more signs of economic and fiscal disaster must politicians of both parties, but especially the vote-buying Democrats, have to observe before they “wake up and smell the coffee?” But they don’t care: they will be long out of office and have made enough money to insulate themselves from any fiscal crisis. Meanwhile, they place our grandchildren deeply in debt.

First, Standard & Poor’s, now Moody’s. All we can do now is wait for Fitch to weigh in.

But that’s just my opinion.

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