Standard & Poors Rings The Reality Bell

by Robert Allen Bonelli

Standard & Poors (S&P), the credit rating agency that started in business more than 150 years ago and operates in 23 countries, issued the ultimate in realty checks this week when they downgraded its credit outlook for the United States.  S&P cited a “material risk” that policymakers may not reach agreement on a plan to trim the large federal budget deficit.

While the agency maintained the country’s top AAA credit rating, it said “Authorities have not made clear how they will tackle long-term fiscal pressures.” S&P said the move signals there is at least a one-in-three chance that it could cut its long-term AAA rating on the United States within two years.

What would a credit rating downgrade mean to the average citizen?  Immediately following a downgrade, the interest required to refinance our debt would climb dramatically and the Federal Reserve would have to print more money resulting in a sharp devaluation of the dollar.  If you think $4 per gallon for gasoline is an outrage, try $8 per gallon or higher.  If you think that your 401(k) took a hit in 2009, how about a permanent hit due to the United States currency losing its value?  Food, energy, clothing, housing and all other staples of life will experience sharp and permanent price increases.  Unemployment will also rise as businesses attempt to adjust to a new and uncertain economy.

It should be absolutely clear that the growing national debt and continued federal budget deficits are a threat to our economy and a clear and present danger to our way of life.  President Obama took office with a $10 trillion debt and a $740 billion federal budget deficit.  Two years later the national debt is $14.2 trillion and the federal budget deficit has reached $1.6 trillion.  Mr. Obama and the Democrats insist that we need to keep spending, even though our debt will exceed our Gross Domestic Product (GDP) before the end of this year.  They insist that rolling back the George Bush era tax cuts for those making more than $250,000 per year and reductions in defense spending is the path to a solution.

The truth is that the additional revenue potential from rolling back those cuts would only equal a maximum of $64 billion per year.  The risk to jobs in our economy by increasing tax rates on many small businesses that are taxed as individuals, S-Corporations, is extremely high.  There could easily be a spike in unemployment as those business owners adjust their planning to preserve their net income.

If Congress and the President were to cut defense spending was by 20%, a number that would be dangerous with our armed forces involved in three current conflicts and the continued terrorism threat to our country, the maximum savings would be $150 billion per year.  The security risks of doing this would likely win the argument, with actual savings being significantly less.

S&P said it clearly, it is all about “large budget deficits and growing government indebtedness” and the only answer is to accept the fact that we have a spending problem.  Entitlement spending is the major driver of the problem and can no longer be ignored.  Mr. Obama is rapidly becoming a modern day Nero with the Democrats, and many Republicans, in Congress all happy to play harmonious violins while the nation burns.

The time for political rhetoric is over.  Mr. Obama’s lack of leadership on this issue is disgraceful and he no longer has the luxury of voting “present” while taking shots at the real entitlement reform ideas that were put forth by Representative Paul Ryan.  That said, even the Ryan plan still continues to grow the national debt over the next ten years.  It does so much less than what Mr. Obama originally presented, but it still grows the debt by several trillion dollars over that period.  Hence, both the parties need to accept the reality that the federal government needs to spend no more than it takes in.  The debt has to stabilize immediately, with a clear path to reduction visible enough to protect the AAA credit rating of the United States.

The American people also have a role to play.  In fact, the American people will ultimately drive this debate.  Entitlement reform is not just prudent, but is critical.  Accepting a retirement age of 70 that would start ten years from now; understanding that Medicare will require more premium participation in the future; eliminating the federal bureaucracy and moving responsibility for Medicaid to the states in the form of block grants; and eliminating countless discretionary spending by limiting the federal government to the seventeen enumerated powers granted in the Constitution are far better than a serious devaluation of the dollar.

S&P has ended the debate.  Spending is the problem.  Our children’s future is on the line.

Robert Allen Bonelli is the author of “Liberty Rising,” an accomplished business executive, public speaker and involved citizen.


Email this to a friend | Print | Share on Facebook | | Bookmark and Share

Tags: , , , , , , , , ,
Posted Apr 18th 2011 at 12:42 pm in Economics, Federal Spending, Politics | 63 Comments