Last week, Standard and Poor’s dropped the United States of America’s credit rating. S&P’s downgrade of the U.S. sovereign credit rating to AA+, although not totally unanticipated, adds uncertainty to the world markets. The implications include pushing up borrowing costs on everything from mortgages and corporate debt to government bonds everywhere. The world’s largest, greatest and safest economy is no longer the safest; at least for now. Standard and Poor’s had concerns about the recent difficulty Washington had in arriving at a debt package just a day before an all but certain default.
More particularly, the revisions show that the recent recession was deeper than previously thought, so the GDP this year is lower than previous projections in both nominal and real terms. As a result, the debt burden is slightly higher. Generally, debt burdens tend to be higher in recessions due to involuntary unemployment, lower tax receipts by governments, and the required safety net with which the government protects citizens from economic hardships. The Fed holds more than $1 trillion of U.S. treasuries. That’s over 70 percent of all outstanding debt, making it the largest U.S. lender on earth. In addition, the states have debt concerns quite apart from the federal government. The lowest per capita debt is in Tennessee ($674) while the highest per capita debt is in Massachusetts ($10,500). Individually, the states have been slashing budgets to lower their debt per capita.
Second, the revised data highlight the sluggishness of the current economic recovery when compared with rebounds following previous post-war recessions. S&P believes the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, the S&P downside case scenario assumes relatively modest real trend GDP growth of 2.5 percent and inflation of near 1.5 percent annually moving forward. Possible cures for a lag in demand include increasing exports of goods and services, as well as infrastructure projects which may be paid for by tolls in the future. The Obama administration has projected a considerable increase in exports by 2014.
The Moody’s Corporation held their U.S. credit assessment at a top rating for now. Despite avoiding a downgrade, that company provided a sobering assessment for investors worldwide. Moody’s said the United States and other major Western nations have moved “substantially” closer to losing their stellar ratings. The ratings are stable, but their distance to downgrade has in all cases diminished considerably, the credit ratings agency pointed out.
The United States Federal Deficit is projected to fall from $1.3 trillion to $800 billion by 2015. The U.S. real GDP may grow from $13 trillion to $16 trillion or more in the same year. Defense is held to a constant $900 billion in the same four-year period. If the line is held at $900 billion, the defense budget will decrease from the current 7 percent of GDP to 5.6 percent of GDP but not down to the 3.5 percent of GDP at the conclusion of President Clinton’s term. Essentially, the disengagement from the Iraq and Afghanistan wars make up the difference in DOD spending.
In 1941, the rich (the captains and managers of industry) paid 55 percent of all federal taxes and workers 45 percent. A top rate of 90 percent or higher taxed the incomes of the wealthiest citizens. President Franklin D. Roosevelt, elected with considerable labor support, said that no American should have an income of more than $25,000 after taxes; about $350,000 in today’s dollars. And so, the question involves who will pay the bill for the dual wars of the previous decade, as well as the winding down of those wars in Iraq and Afghanistan.