Waking Up to Economic Realities

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Waking Up to Economic Realities
        
Last week the financial markets were roiled by Standard & Poor’s announcement 
that they will change their outlook on the fiscal health of the United States 
over the next two years from “stable” to “negative”.  The administration 
decried this decision as political.  However, it seems the only political 
thing about this decision is the fact that it took so long.  The Washington 
Post recently reported that the White House and the Treasury Department put 
tremendous pressure on S&P not to do this.  However, if S&P made its ratings 
based on political pressures rather than economic reality, it would cease to 
have any relevance to the business community.  Even if S&P delayed its 
announcement that U.S. government bond market would be downgraded, at some 
point it would become obvious that the finances of this country are out of 
control and our leadership is out of touch.  All credibility would be lost if 
S&P simply continued to assign U.S. debt a AAA rating. 

S&P noted in its announcement that negotiations among leaders in Washington 
to address deficit concerns did not sound promising, and expressed skepticism 
that politicians could agree to any viable budget compromise.  Of course this 
has been obvious for years but in the midst of the current debate over 
raising the debt limit it is perhaps the wake-up call that Washington needs.  
For decades politicians and government officials have been able to maintain 
their denial about our real financial situation, patching the system together 
by passing emergency and supplemental funding bills, issuing more debt, and 
allowing the Federal Reserve and foreign creditors to paper over deficits 
with more monetary expansion.  I’ve said many times the real day of reckoning 
comes when fiscal and monetary tricks no longer work and there are no buyers 
for our debt.

Even the most conservative budget that has been proposed by Republican 
leadership requires raising the debt ceiling by an additional $9 trillion by 
2021.  This demonstrates absolutely that no one in power right now has any 
real intention of addressing our spending problems or paying down the debt.  
They simply expect to continue to borrow and run up more debt forever, 
without limit.  Yet they always imagine our dollar will have value no matter 
how many we print.    This expectation is foolish and naïve.  I guarantee 
that those buying our debt are not foolish and naïve enough to go along with 
this charade forever.

The S&P announcement may just be the harbinger of economic realities acting 
as a restraint on government expansion.  Government is not anxious to cap its 
own growth, in spite of misnomers like “debt limit” or “deficit reduction”.  
Government will continue to grow like a cancer, sapping our country of its 
wealth and freedom until the laws of economics no longer can be ignored.

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