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Why are people now saying that without spending cuts our credit rating will drop?
Moody's and Standard & Poor's threatened to drop our credit rating in the event a default either happens or becomes imminent. As long as interest rates remain low, there is no danger of defaulting simply because of a high debt or deficit. Greece is in that kind of danger because they have had increasingly difficult times borrowing money, which in turn drove up their interest rates to about 30%. Our interest rates are close to zero, historic lows. As important a long-term problem as the debt and deficit are, it simply isn't a short-term threat to our fiscal solvency. The only tangible danger of seeing a dramatic rise in interest rates is if we default or get so close to it that the credit rating agencies think we will default.
It's like the difference between a flood and a tsunami. For a flood you build a levy, open flood plains, secure your home, and have an orderly evacuation. For a tsunami, you seek higher ground immediately, regardless of what you have to leave behind. If you run from a flood, you'll lose everything you own when you could protect it. If you don't run from a tsunami, you will die. It seems by insisting on a grand bargain we are treating a flood like it's a tsunami and a tsunami like it's a flood, trying to prepare for a possible default by slashing spending as fast and recklessly as possible.
I've seen Obama make this statement in the last few days, since Moody's threatened to cut our credit rating if we get too close to default. It seems like he is saying that to justify his goal of a grand bargain, arguing against the McConnell/Reid plan (which is a plan that I don't like at all, but it's probably the best deal we're going to get at this point, now that Obama has botched the negotiations so badly, though granted even that plan may not be able to get through right now). More recently, I've started to see reporters, including on NPR where they should know better, making this same statement.
Has anyone seen any credible economists explaining this short-term threat (or can anyone explain it themselves)? Am I missing something here? Or are they conflating the short-term debt ceiling crisis with the long-term debt crisis unnecessarily?
(NOTE: I understand that the two are related, in case that's not clear, but one is an immediate problem that we have to deal with now or risk the enormous consequences of default and the other is longer-term problem that periodically leads to the threat of these short-term problems, along with other issues.)
Thanks BadWolf. That's the fastest I've ever gotten a good answer to my question. I'll give you Best Answer once enough time has passed that I'm allowed (unless someone else has a better one).
I hadn't seen that threat. A credit rating agency making a threat like that when US interest rates are close to zero and the bond market has shown no sign of losing it's appetite for American debt is rather suspicious. Our debt hasn't suddenly changed, nor have the difficulties of Congress to make grand bargains. What is different now, though, is that the new regulations in Dodd-Frank that credit rating agencies oppose because it makes them liable in Court for negligence in their ratings (since their negligence is part of why junk credit default swaps were traded like they were solid gold).
The credit rating agencies do important work, but there has been a lot of questions lately about their inner workings and biases toward their own bottom lines. It makes me wonder if this threat, which doesn'
...doesn't seem to have any real bearing on our credit worthiness at this time, is a threat to try to get the government to quietly de-fund Dodd-Frank as part of a grand bargain, a goal the Republicans have stated repeatedly.
From the same article you cited:
"Even if they were unconnected, S&P and the ratings agencies have taken this opportunity to tie (major deficit reduction and raising the debt limit) together," said Adam Ozimek, an economist at Econsult in Philadelphia who co-writes the popular Modeled Behavior blog on economics.
They are tying them together because of Congress' "game of chicken", but I wonder if that is just a cover that allows them to make the threat because of their own bottom line. Nothing about Congress' inability to cut the deficit is new and they know that. This is gamesmanship.
6 Answers
- ?Lv 710 years agoFavorite Answer
"The credit ratings agency Standard & Poor's has indicated that it has so lost faith in Washington's ability to tackle big problems—because of the difficulty in solving such a simple one as how to avoid default—that simply raising the debt limit by August 2 won't be enough to spare the U.S. from what would be an earth-shaking downgrade of its credit rating.
Instead, ****the agency insists that lawmakers must agree to a $4 trillion package of deficit reduction****, at least, either as part of the ceiling deal or soon thereafter. That puts major pressure on Obama and Congress to cut a big deficit deal, or at least agree to a framework that markets find to be credible, possibly on the order of what the Senate "Gang of Six" is proposing."
- ?Lv 710 years ago
"NOW" saying?
It's been obvious for a long time that without spending cuts our credit rating will drop. That's what happens when your debt goes beyond sustainable levels and you continue to INCREASE it as all Democrats DEMAND.
Even if interest rates remain low, default is GUARANTEED unless we set-aside universal Democrat demands and stop escalating the debt.
The short-term threat to our fiscal solvency is that the entire Democrat caucus is literally threatening to break the law and refuse to make debt-payments unless we allow DEEPER debt to be piled on their children.
It's like the difference between a flood and a tsunami. For a flood you build a levy, open flood plains, secure your home, and have an orderly evacuation. For a tsunami, you seek higher ground immediately, regardless of what you have to leave behind. 100% of Democrats are threatening to CAUSE a tsunami now unless we enable a future flood.
- 10 years ago
The problem will come from the government defaulting on it's debts if they don't raise the debt limit.
The debt limit has been raised dozens of times in the past and mostly under republican administrations. The only goal of the republicans at this time is to try to make president Obama look responsible for their own stupidity and they don't care if they take the country down with him.
- breitenbucherLv 45 years ago
moving into severe debt isn't something new - been happening for the time of historic previous. Hitler understood it nicely adequate - he cancelled the Weimar Republic's debt, the single that led to the hyperinflation, via taking photographs the bankers and their families. while he ran out of infantrymen with the tummy for it, he basically gassed them quite. till now long, there'll could be a jubilee, the place all debts are cancelled, and all of us initiate lower back. Are we waiting for it, or are we going to allow the thieves take over as quickly as lower back as quickly as we get our funds decrease back? now's the time to start making waiting a revised shape that rewards public integrity, quite than inner maximum greed and crafty. till that happens, no gadget, from despite political wing, stands a desire in hell of working.
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- Anonymous10 years ago
Moodys S+P are also scam companies. They dont want to look bad so they have to give that statement.
