July 15, 2011

FORGET THE DEBT CEILING: S&P: U.S. Debt Could Reach ‘Junk’ Rating by 2030, Absent Entitlement Reform.

Key words: “Entitlement Reform.”

UPDATE: WSJ: The Obama Downgrade: The real reason the US could lose its AAA rating.

So the credit-rating agencies that helped to create the financial crisis that led to a deep recession are now warning that the U.S. could lose the AAA rating it has had since 1917. As painfully ironic as this is, there’s no benefit in shooting the messengers. The real culprit is the U.S. political class, especially the President who has presided over this historic collapse of fiscal credibility. . . .

On spending, it is important to recall how extraordinary the blowout of the last three years has been. We’ve seen nothing like it since World War II. Nothing close. The nearby chart tracks federal outlays as a share of GDP since 1960. The early peaks coincide with the rise of the Great Society, the recession of 1974-75, and then a high of 23.5% with the recession of 1982 and the Reagan defense buildup.

From there, spending declines, most rapidly during the 1990s as defense outlays fell to 3% of GDP in 2000 from its Reagan peak of 6.2% in 1986. The early George W. Bush years saw spending bounce up to a plateau of roughly 20% of GDP, but no more than 20.7% as recently as 2008.

Then came the Obama blowout, in league with Nancy Pelosi’s Congress. With the recession as a rationale, Democrats consciously blew up the national balance sheet, lifting federal outlays to 25% in 2009, the highest level since 1945. (Even in 1946, with millions still in the military, spending was only 24.8% of GDP. In 1947 it fell to 14.8%.) Though the recession ended in June 2009, spending in 2010 stayed high at nearly 24%, and this year it is heading back toward 25%. . . . The President is now claiming to have found fiscal virtue, but notice how hard he has fought House Republicans as they’ve sought to abate the spending boom.

Junk leadership and junk policies lead to junk status.

UPDATE: This reminds me of the Insta-Dad’s prophetic take on TARP: “The bad thing is that the federal government has figured out that it can borrow a lot more money than it previously thought.”

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