06 August 2011

What a Surprise

More like USAA+, amirite?

The United States has lost its coveted top AAA credit rating.
Credit rating agency Standard & Poor's on Friday downgraded the nation's rating for the first time since the U.S. won the top ranking in 1917. The move came after Congress haggled over budget cuts and the nation's borrowing limit -- and failed to cut enough government spending to satisfy S&P. The issue has contributed to convulsions in financial markets.
The drop in the rating by one notch to AA-plus was expected. The three main credit agencies, which also include Moody's Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. S&P said that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country's debt situation. Moody's said Friday it was keeping its AAA rating on the nation's debt, but that it might still lower it.

Just in case someone doesn’t understand how credit ratings work, it should be noted that the reason US debt was downgraded was not due to Congress’s inability to borrow a couple trillion more dollars but rather it was due to questions about the federal government’s ability to repay its debt.  For some reason, ratings agencies find it problematic when an entity borrows an increasingly astronomical amount of debt year after year without increasing revenue or cutting spending.

It’s sort of like how a doctor might doubt the longevity of a patient who continues to drink like a fish after being brought into to be treated for alcohol poisoning.  Sure, the patient could recover and kick his habit, but the current situation suggests that this is an unlikely hypothesis.  Likewise, as the federal government lives increasingly beyond its means, simple linear mathematics would suggest that there will come a point when repayment is going to be less than guaranteed.  And that is why US credit has been downgraded.

2 comments:

  1. The part that kills me is how big a deal our credit rating was in the debate leading up to the lifting of the debt limit. As in "if we don't raise it, our rating will be at risk!!!!!!!"

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  2. @EW- I found that claim to be especially irksome because of how remarkably stupid it was. Ratings agencies are primarily concerned with determining whether an entity will be able to pay back its debt, and debt limits have very little to do with answering that question.

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