04.19.2011 0

Sovereign Debt Downgrade Imminent, Time for Balanced Budget Now


By Bill Wilson – The U.S. cannot say it was not warned. For years now, sovereign credit rating agencies have repeatedly told Congress to get its torrent of deficit spending under control, or else face a downgrade of its gold-plated Triple-A credit rating.

Alas, we did not listen. Standard and Poor’s (S&P) was the first agency in the West to fire its warning shot, downgrading its outlook on U.S. debt from “stable” to “negative.” Their reasoning? “Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,” said S&P’s statement.

In other words, relative to other nations whose credit is rated Triple-A, we are fiscally irresponsible. The size and scope of America’s rapidly escalating $14.3 trillion gross national debt coupled with a complete lack of willingness to rein it in, if it continues to grow for long, will not warrant a perfect credit rating.

But isn’t the U.S. special and have more room to maneuver on sovereign debt? “Although we believe [the] strengths [of the U.S. economy] currently outweigh what we consider to be the U.S.’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,” said S&P’s credit analyst Nikola G. Swann.

That means a full credit downgrade is now substantially more likely in the next year or two. And judging by the stock market’s reaction to the news, such a development will not at all be good for the U.S. economy. In truth, it will make the housing bubble popping look like a pimple; a credit downgrade will likely set off a run on dollar assets. Why?

Because, really, a downgrade is long overdue. S&P notes that the current Triple-A rating “reflect[s] our view of the unique advantages stemming from the dollar’s preeminent place among world currencies.” That means one of the only reasons we have not already been downgraded is because sovereigns around the world stockpile dollars as the world’s reserve currency as if it were as good as gold.

Such a status for the dollar has previously allowed the Federal Reserve to print seemingly limitless amounts of money to purchase everything from U.S. treasuries (it has $1.37 trillion worth) to mortgage-backed securities (it still holds $937 billion worth from the 2008-09 bailouts) — all with limited, although still measurable impact upon inflation.

This is playing with fire. The only thing holding up this house of cards is perception — the faith that other nations will continue to trade in dollars. And what we are learning now is that simply the fact that the world has done so for the last 60 years is not enough to prop up the system, as evidenced by S&P’s very real threat of a downgrade.

The time for half-measures has long past. Elected leaders have not presented any budget to meet the challenge of an imminent credit downgrade. The Obama proposal will never balance the budget, and the House-passed budget will take 26 years to do so.

Make no mistake, if we cannot balance the budget sometime soon, we are in trouble. With a $14.2 trillion gross national debt that will be larger than the entire economy by year’s end, growing to over $25 trillion by 2021, soon our obligations will become too large to refinance, let alone be repaid.

The threat of a downgrade is now, meaning we don’t have 26 years to balance the budget. Members should Congress should use the distress of this news to shock them into action, namely by adopting the Balanced Budget Amendment proposed by Senator Orrin Hatch — before it is too late.

Bill Wilson is the President of Americans for Limited Government.

Copyright © 2008-2024 Americans for Limited Government