S&P Downgrade a Harbinger of Things to Come

Posted: Apr 27, 2011 12:01 AM

Standard & Poor’s announcement last week that the rating agency had chosen to downgrade the U.S. Treasury securities rating from neutral to poor sent investors, politicians, and pundits alike into a tizzy, as they struggled to make sense of the implications of the potential scenario in which the U.S. might lose its AAA S&P rating.

Simply put, the S&P deemed that the rapidly growing national debt and increasing inability of political leaders to find a solution to our budgetary woes bodes poorly for the future of Treasury securities’ wellbeing.

Since that announcement, it has been revealed that in the lead-up to the S&P revelation, the Obama Administration lobbied the S&P to put off publishing their report. But after a series of meetings between the Treasury and the S&P, the latter flouted that request.

Despite the Obama Administration’s best efforts to downplay the announcement, the S&P warning is not anomalous in the roller coaster ride that has been recent budgetary news. Earlier this year, the International Monetary Fund mulled over replacing the dollar with some other form for the world reserve currency. The dollar has become too vulnerable to value swings as a result of American budgetary policy to be a stable index for the global economy. In short, our most basic currency is no longer stable enough to be relied upon globally.

The origins of this issue are not a mystery: Our country is well on its way to complete and utter budgetary meltdown.

The US National Debt is now over $14 trillion—that’s more than $45,000 for every citizen and more than $220,000 for every family of four. The current annual deficit alone is a record $1.5 trillion, more than $4,800 for every citizen and nearly $20,000 for every family of four.

Both recent revelations—the potential S&P rating downgrade and the IMF kerfuffle—as well as numerous others bespeak the fact that the nation faces an impending budgetary catastrophe that threatens the very fabric of the American way of life. The U.S. is losing its credibility in the world.

Thankfully, Americans seem increasingly cognizant of this fact and it is beginning to have an effect on the dialogue in Washington: Finally, the rhetoric inside the Beltway on the subject of debt and spending is that things need to change, or we will find ourselves on the cliff of the federal debt disaster scenario.

But unfortunately this is neither an accurate characterization of our plight nor a sufficient reaction to what ails us. In reality, we are already on that cliff, and without immediate action, we will face complete budgetary meltdown.

Year after year, leaders in Washington fail to rein in this out-of-control federal spending. And now the United States is on the brink of fiscal collapse.

This is why many believe that the only solution is a federally mandated balanced budget amendment to the Constitution. Passage of a balanced budget amendment is the only means by which we can begin to return to fiscal sanity as a nation.

Either our leaders will require a constitutionally mandated balanced federal budget, or international bankers and US debt-holders – including China, Russia, and oil-exporting countries – will do it for us.

There is no shortage of examples of countries that have failed to heed the warnings of fiscal disaster. China and other bond-holders and foreign investors are now forcing austerity upon Greece, Ireland, Portugal, Spain, and other debt-ridden countries. These countries have seen their unemployment rates nearly double since their financial woes have become so readily apparent.

Treasury Secretary Tim Geithner has warned Congress that it must approve an increase to the debt ceiling in the next two to three months to avoid a government shutdown. But Americans seem more steadfast in their frustration for this issue than our own leaders. An April 21 CBS Poll found that 63 percent of Americans oppose raising the debt limit, with only 27 percent of respondents saying they would support it.

Inevitably, the debt ceiling will have to be raised and will be after much scrambling and handwringing. Congress cannot realistically abandon the spending commitments it has made, whether those are legitimate commitments or not.

However, those compromises must not be made without a simultaneous and concerted effort to forward true and lasting budgetary policy reform such as the federal balanced budget amendment, and news such as the S&P rating ought to serve as a spark-plug for that reform discussion.

Warnings like that of the S&P and the IMF are important reminders that our leaders must find solutions to our out-of-control budget before it’s too late. Our nation’s sovereignty is at stake.

See also:

Larry Kudlow:  The Left Hates Oil Companies 
Dave Ramsey:  Dave Says No New Debt  
John Ransom:  It Tax a Village
Mike Shedlock:  More Retirement Worries
Ken Buck:  S&P Downgrade a Harbinger of Things to Come