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Downgraded! S&P Fires A Warning Shot At The U.S. Economy

The American economy is in such a woeful state that even the most willfully optimistic organizations world-wide are having a hard time denying the truth. A classic case in point is the rating agencies. They maintained that junk mortgage securities were AAA or at the very least BBB well into the housing implosion. Thus, it is truly a rare moment when one of them comes forward with bad news.

The S&P did just that in the middle of April, bucking international consensus to call a spade a spade. They took their future outlook for the U.S. economy and downgraded it to negative. The markets tanked and gold spiked as a result, but then things leveled out. Osama bin Laden was killed, tornadoes hit the South and Midwest, and there were other headlines in the news.

Unfortunately, the realities of the downgrade don’t vanish with today’s headlines. The S&P is quite serious in its statements that the United States is falling behind its peers in financial matters, and we are going to have to face the consequences in the near future.

Veiled Threats To Lawmakers

Within the S&P’s statement about the outlook downgrade were a number of veiled threats to lawmakers. All the political jawboning about the budget isn’t moving the bottom line, and while it may fool some of the masses, it’s not fooling the number crunchers.

“We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns,” said the S&P. In other words, if Congress and the president don’t quit paying lip service to the debt problem and do something real about it, America is in for a serious slap in the face from the ratings group.

A loss of the AAA credit standing would make it harder for the government to borrow the money it needs to keep spending (and spending and spending). Higher interest rates would be in effect on U.S. debt, making it necessary to allocate more of our scare resources to debt servicing instead of essential services. The government would also have to pay more in interest to sell its bonds, crippling its ability to borrow more money. Not such a bad thing in some minds … but these debts are what keep the Social Security checks coming in on time.

Willful Denial By The Government

After the S&P announcement, the government was on the defensive. The Obama administration defended their plans to fix the economy, touting a number of cuts that will happen to the budget. Unfortunately, many of those cuts will happen under future presidents, not now.

In the S&P analysis of the U.S. situation, they pointed out that the ability of current presidents to enact budgetary limits on future Congresses is generally limited. In other words, the government can cut, cut, cut all it wants, but if those cuts aren’t happening in real-time and in the real world of the present, those cuts don’t count.

Your Call For The Future

Looking at both sides, it is your call. Do you think the government will get their act together, or is it time to start planning for a downgrade? If you don’t know, here’s a hint from Off the Grid:  Plan for the downgrade.

In a downgrade scenario, the government will have been unable to contain the costs of the leading entitlement programs and failed to cut defense spending. With one in seven Americans currently on food stamps according to the Wall Street Journal, this scenario is much easier to imagine than Congress suddenly remembering deficits have consequences.

After a downgrade, the main issue will be the collapse of the dollar. The San Francisco Chronicle notes dryly that “hard assets will have legs” in a collapsing economy, as will hard resources like fresh water, a solid food supply, and alternative forms of currency, like silver and gold. This is hardly news for regular readers, but having an international flagship institution like the S&P sound the warning is a new development in the deteriorating state of the economy.

Perhaps everything will work out for the best … but the major players are putting their two cents in early. The S&P deadline for improvement is 2013, while the International Monetary Fund notes that by 2016 China’s economy will overtake America’s. It’s not a distant doomsday we face … it’s the very near future.