Could the U.S.’s Credit Rating Be Downgraded Again?

It’s not too late for this country…

On that historic day when Standard & Poor’s stripped the U.S. of its elite AAA status last year, because of its large government debt and budget deficit, it has been forgotten that the rating agency placed a negative outlook on the country’s rating.

 The negative outlook centered on the fact that our country had no concerted medium- or long-term plan to reduce the debt, let alone the budget deficit. Of course, such a plan will be difficult to conceive or even implement in an election year, but the budget deficit is nonetheless estimated to be $1.3 trillion this year.

 Standard & Poor’s came out this week warning that the U.S. faces another rating cut in the next six to 24 months if a credible plan is not put in place to tackle the relentlessly rising government debt and the budget deficit.

Standard & Poor’s acknowledges that not much can be done about the U.S. fiscal problems until after the elections, but at least it is putting the current/new administration on alert, warning them that if one of their first mandates is not creating a plan to bring the budget deficit under control, then another downgrade will follow.

 Yes, after the downgrade of the U.S. credit rating last summer, demand for U.S. bonds went up and interest rates continued to fall. This was due to a confluence of events: the crisis in Europe; the Arab Spring; and the privilege of being the reserve currency.

Privileges are earned, not given. Just because we have the reserve currency now, doesn’t mean we will retain it in the future; not with trillion-dollar budget deficits. In order to continue to earn that right, we need to address the ballooning government debt (and trillion-dollar budget deficit), which stands at over $15.0 trillion. In addition to this, our unfunded liabilities are at the very least $55.0 trillion.

 I commend Standard & Poor’s for drawing attention to one of the most important issues facing our country. The problem is that tackling the debt and budget deficit means tackling entitlements: Medicare and Social Security are the major ones.

 This will cause an uproar among Americans, which is why politicians don’t want to touch it; it will greatly reduce their chances of being re-elected.

 With budget deficits of at least a trillion dollars being created annually, clearly we are on a path that is unsustainable. We need true leaders to stand up, discuss the issues in a concise manner, and make very difficult decisions that will steer us onto a path of fiscal discipline—budget surpluses, not budget deficits—on the road to reducing the government debt.

 It is not too late for this country, but if we continue down this budget deficit path, one day it will be. We cannot have our children inherit this mess. I cannot think of one responsible father who, witnessing their child run into high debt (budget deficit), says, “Don’t worry son; just increase the credit limit on your card and you’ll be fine.”

 Investors in our government bonds will one day look at the trillion-dollar budget deficits and escalating government debt and have little confidence that it can ever be repaid. Once that occurs, no one will want our bonds, which will send interest rates rocketing higher.

 There is a one-in-three chance that the U.S.’s credit rating will be downgraded again. Remember what happened when Standard & Poor’s first downgraded the U.S.? It sent the stock market down dramatically. History has a tendency to repeat itself. (Also see: Getting Used to Trillion-dollar Annual Deficits.)

 Where the Market Stands; Where it’s Headed:

 The Dow Jones Industrial Average sits 130 points away from the 13,000 level…something the world’s most widely followed stock market hasn’t touched in four years.

 As I note above, the world’s major economies are slowing quickly here in 2012. Government debt has gone wild. The budget deficit is out-of-control. Massive monetary stimulus will eventually trigger inflation, which will cause interest rates to rise…and the stock market is rising?

 We are in a bear market rally that started in 2009. The purpose of this phase of the bear market is to lure investors back into stocks. The bear is doing an excellent job of this. Enjoy the rally, my dear reader. It’s getting tired and “long in the tooth” as they say.

 What He Said:

 “When property prices start coming down in North America, it won’t be a pretty sight, because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in PROFIT CONFIDENTIAL, June 23, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.