The republican-led Congress took a timid step towards responsibility Sunday, for which every politician and lobbyist in D.C. gave themselves credit and applause. The House debated then approved the deal, as did the Senate, and President Obama signed it into law on Tuesday. The credit rating agency Moody’s came back Tuesday with confirmation that the United States retains its Aaa rating with Moody’s, but with a negative outlook. As of this writing, Standard & Poor’s has not released a statement regarding the United States’ AAA/A-1+ rating and the “CreditWatch Negative” alert issued July 18 remains unchanged at this time. For both agencies, the United States enjoys the highest possible rating, on the basis of economic resiliency, financial strength, and susceptibility to event risk. In other words, there remains no concern that the United States will fail to pay its debts, nor that the country will fail to honor its obligations in the foreseeable future, but the amount of debt carried by the United States must be seriously addressed in the coming year, and the plan fulfilled within the decade.
In its most recent release, Moody’s went into some detail regarding its concerns.
The money quote:
“The initial increase of the debt limit by $900 billion and the commitment to raise it by a further $1.2-1.5 trillion by yearend have virtually eliminated the risk of such a default, prompting the confirmation of the rating.”
Sounds good, but Moody’s goes on:
“today’s agreement is a first step toward achieving the long-term fiscal consolidation needed to maintain the US government debt metrics within Aaa parameters over the long run … In assigning a negative outlook to the rating, Moody’s indicated, however, that there would be a risk of downgrade if (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government’s funding costs over and above what is currently expected.”
In other words, we’re still on probation. So what does Moody’s expect from a responsible government?
“First, while the combination of the … process and automatic triggers [can] … induce fiscal discipline, this framework is untested … Moody’s baseline scenario assumes that fiscal discipline is maintained in 2012 … Second, further measures will likely be required … Specifically, Moody’s expects to see a stabilization of the federal government’s debt-to-GDP ratio not too far above its projected 2012 level of 73% by the middle of the decade, followed by a decline.”
Gee, that sounds a lot like what the conservatives suggested, doesn’t it? But there’s more from Moody’s:
“Recent downward revisions of economic growth rates and the very low growth rate recorded in the first half of 2011 call into question the strength of potential growth in the coming year or two. Continued very low growth would make fiscal consolidation more difficult. As a result, Moody’s will also be monitoring the pace of growth as it relates to the fiscal effort.”
In other words, government cannot get away with tax hikes that keep unemployment high and hurt business, just because they need to pay down the debt. The only way to get the job done is to make serious spending cuts, revive the economy by keeping government out of the way, and to raise revenue without raising anyone’s tax rate. Again, this what conservatives have proposed all along. Cutting spending reduces the burden and the economy will come back just fine if government will just back off from ridiculous new rules and punitive policies.
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