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President Barack Obama announced Sunday night an agreement with Congress to raise the debt ceiling. So why are credit-rating agencies still considering downgrading the U.S.’s AAA-rating?
The president maintained in his address to the nation that the deal had averted a potentially disastrous situation in which the federal government would have been unable to service the interest on the national debt, thus degrading the nation’s credit rating and increasing the expense of future borrowing. His Sunday-night sermon styled the deal as “an agreement that will reduce the deficit and avoid default—a default that would have had a devastating effect on our economy.” In fact, he invoked the specter of “default” five times in the speech.
But with non-borrowed federal income for August exceeding $170 billion, and interest on the debt amounting to less than $30 billion for the month, there was never any danger of America’s creditors missing a payment for lack of funds. Moody’s acknowledged as much late last week. “If the debt limit is not raised before August 2, we believe that the Treasury would give priority to debt service payments and could thus postpone a potential debt default for a number of days,” the credit-rating agency said. “Revenues would be more than adequate for some period of time to meet those payments, although other outlays would be severely reduced as a result.”
While Moody’s is expected to maintain the U.S.’s AAA-rating, Standard and Poor’s is expected to downgrade it. The president insisted that if Congress didn’t raise the debt limit, America’s credit rating would be harmed. Congress appears to have done what the president wanted, but America’s credit may still be harmed. What gives?
The patently absurd but widely accepted claim made repeatedly by the president throughout the debt-limit negotiations is that not borrowing more would harm America’s credit. The claim is not only not true, but the opposite of the truth. Out-of-control borrowing, not curbs on more debt, is what has imperiled America’s standing in the eyes of lenders.
U.S. debt as a percentage of the gross domestic product stood at less than 60 percent just ten years ago. It now approaches 100 percent. In other words, it would take the amassed economic output of every American for about one year to pay off the debt.
What changed from 2001 to 2011? The federal government ran massive deficits to pay for new spending programs. Wars in Iraq and Afghanistan, the prescription drug plan, bailouts to the auto and financial sectors, a pricy stimulus package, an aging population driving up Medicare and Social Security expenses, increased debt-servicing costs, and a massive health-care subsidy perversely known as the “Affordable Care Act” have thrown spending levels out of balance. Federal spending as a percentage of GDP, under 20 percent just ten years ago, now exceeds 25 percent.
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