The US is presently driving off a budgetary cliff driven by out-of-control government spending, and because of a legacy of poor leadership, nothing can be done now to stop the inexorable loss of the US’s coveted triple-A credit rating. When evaluating the debt of countries, the bond rating firm Moody’s states that “the point at which a [triple-A rating] crosses over [to a double-A rating] does not reflect the point at which debt is intolerable, but the point at which debt becomes a material and noticeable constraint in the making of public policy. This is a normative assessment, informed by historical references” [emphasis added by Moody’s]. By many people’s estimates, the US already meets that definition, but Moody’s has developed a ratio of debt affordability to gauge the tipping point for a nation.
When evaluating the line, Moody’s asserts that “historically, countries with single digit debt affordability ratios do not experience material interference to policy formulation and execution as a consequence of their public debt. When the affordability ratio moves into double-digit territory, policy becomes perceptibly constrained. This 10% threshold marks the…boundary.” For the US, the critical number to consider is a 14% debt affordability ratio, a number that the US is fast approaching.
The situation becomes even more concerning when compared to the stark present political realities.. Using the usually over-conservative predictions of the Congressional Budget Office of the debt affordability ratio over the next decade, the US will clearly pass the 12% threshold relatively soon, and the number then has nowhere to go but up, which leaves the rating agencies no choice but to downgrade the US credit rating.
In theory, politicians could try to craft a solution. But upon examination of the two present budget choices, the budget passed in 2009 at the urging of President Obama (H. Con. Res. 85) and the RSC prospective budget that would balance the budget by 2020 (H. Con Res. 281), one sees that any hopes for avoiding a credit downgrade amount to little more than a pipe dream.
While the numerical inaccuracy of the modeling in each budget shows clearly in the graph above, with either plan, most importantly, they trend nowhere but up. No matter how aggressive the plan to get spending under control and down to the level of tax revenues, the US will face a credit downgrade sometime in the next five years.
This change will have a profound impact on the US, both politically and economically. It will shatter the notion of the US as a leader among nations in terms of economics, and it will make the defense of free markets harder to mount. It will also destroy confidence in US national debt, which will lead to much higher interest rates and make it radically more expensive both to borrow new money and service the existing debt.
Thus, when this change occurs, the US should be prepared to shoulder these additional costs. Most importantly, the US should not be attempting to finance its day-to-day operations with borrowed money when this day comes, meaning that lawmakers and citizens alike must confront the overspending problem immediately and make the hard choices now as opposed to when making those hard choices will cost inestimably more.