By James Buchanan. Imagine an 18 year old college student getting a credit card with a $100,000 debt limit. Imagine there are no such things as government student loans and he blows through that $100k with a year and a half of courses to go (and slim chance of getting a good job in this economy). Would the credit card company raise his “debt ceiling” so that he could keep on borrowing? Of course not. Unfortunately that same logic does not apply to Barack Obama and our shamefully irresponsible Congress.
Congress just voted to raise the debt ceiling from $14.3 trillion to $16.7 trillion. The liberal media has acted as though this was a reasonable compromise as opposed to yet another disgraceful surrender. Almost no one in the mainstream media uttered the “extremist” suggestion that Congress should BALANCE THE BUDGET.
Well, actions have consequences, and Barack Obama has just discovered that runaway government spending will hurt your credit rating and could plunge the economy into a renewed financial free fall. One news article reports “Republicans and Democrats quickly doled out blame to each other for the first-ever downgrade in the nation’s sterling credit rating, an expected but unsettling move that further clouds prospects for the recovery of the fragile U.S. economy. The back and forth came after Standard & Poor’s, one of the world’s three major credit rating agencies, cited ‘difficulties in bridging the gulf between political parties’ as a major reason for the downgrade from U.S.’s top shelf AAA status to AA+, the next level down. The rating agency has essentially lost faith in Washington’s ability to work together to address its debt. The downgrade, hours after markets closed on Friday, is a first for the United States since it was granted an AAA rating in 1917. S&P warned about a downgrade as far back as April. Its decision came just four days after fractious debate over raising the nation’s debt ceiling…. S&P said in its report that downgrading the U.S.’s credit rating reflected the agency’s belief that the debt deal Congress pulled together was not sufficient ‘to stabilize the government’s medium-term debt dynamics.’ S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. A downgrade a notch lower, to AA, will occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period. The downgrade is a psychological blow to an economy that has struggled to recover from the financial tumult of 2008.”
The blow may not be merely psychological. Another article entitled “What happens if US credit rating drops?” notes that “…Overall, the triple-A countries had average interest rates of 2.98 percent, substantially lower than the double-A average of 3.75 percent. That’s real extra money that taxpayers of those lower-score nations have to pay every time their governments go out to borrow. Also, a credit downgrade can have effects that go beyond interest rates. The rise in borrowing costs can cause stock prices to fall (often about 1 percent on the day of a downgrade, according to Goldman Sachs). A downgrade could also have similar negative ripple effects for other credit ratings (such as some municipal bonds), for the foreign-exchange value of the US dollar, and economic growth…”
The difference between AAA and AA ratings is 0.77 percent. The US has been reduced to AA+. For the sake of argument, let’s say that’s half the difference from AAA to AA or a 0.385 percent change in the interest rate that we have to pay for future borrowing. Let’s assume Obama borrows an additional $2.4 trillion. We’ll have to spend an additional $9.24 billion because of our reduced credit rating.
The US stock market has plunged almost 900 points in the last week, reacting largely to the debt ceiling being raised on Tuesday. The announcement by S&P that the US credit rating was being lowered came out on Friday after trading stopped so we’ll likely be in for a punishing stock market drop on Monday because our government can’t balance its budget.
We have two enormous financial elephants in the living room. One is the deployment of US forces all over the world and what it’s costing us. The other is the US government’s commitment to subsidize a First World lifestyle for 100 million Third World people currently living in the US. We can no longer afford either of these financial black holes. A responsible government would admit its limitations, cut out both of these wasteful expenditures and balance the budget. The Obama regime however is a slave to special interests, including the Israeli Lobby and will keep wasting our money until the day we vote Obama out of power.
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