Sunday, August 7, 2011

Wake Up Call: The S&P Downgrade

Only the most naïve (like the Treasury secretary and numerous career politicians) should have been caught by surprise with S&Ps downgrade of US Goverment to AA+. The downgrade has been decades in the making, and politicians from both parties are to blame. Many are still in denial of the obvious-- the financial stability of the entitlement programs implemented by FDR and LBJ and expanded by numerous other Presidents and Congresses is unsustainable. The assumption behind their finances are there will always be at least 4 or more people working and paying into the programs than those collecting payouts (yes, early “investors” get paid with later “investors'” contributions). With families having fewer and fewer children, current demographics are throwing a monkey wrench into the implied government promise that workers paying into the system for somewhere between 30 – 45 years can enjoy a nice monthly government check as they live into their 80s and 90s. These programs need a major overhaul to reflect this new demographic reality. True to form, our politicians have not only failed to recognize the problem, but they have poured gasoline on the fire by enacting a massive new, unpopular entitlement called Obamacare whose financial problems could dwarf our current issues with Social Security. Medicare and Medicaid.

Anyone who thinks we don't have a spending problem in Washington just has to look at the past three years of blowout spending-- a trillion in spending added to the baseline:
Stunning.  And all we have to show for it is this downgrade?

Below are the 18 countries considered better credit risks than the US:
France?  We're a worse credit risk than France, that land of leisure and the epitome of the welfare state?  Holy cow, I'm embarassed. 

But what will be the real-world impact of this downgrade?  Hopefully it will focus our political class on the problem and will distract them from doing more harm, and the pressure they feel will perhaps convince the Democrates that spending more money isn't the answer to every problem and cajole the Republicans into accepting some tax increases.  But I'm not convinced this happen since I think the excessive partisanship is coming from top levels of the government.  I expect the stock market to take in on the chin for at least another week.  But I don't expect interest rates on government bonds to change much.  I believe the biggest impact will be a wave of muni-bond downgrades, since most states and municipalities are dependent on payments from the federal government.  If the feds are not AAA, how can they remain AAA?  The states, municipalities and average Americans will take the brunt of this downgrade.

HT: Gateway Pundit

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