U.S. Debt Downgrades Are a Foregone Conclusion: David Stockman
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The nation's triple-A debt rating could be at risk of another downgrade. Moody's Investors Service warned Tuesday it would downgrade America's top-debt rating in 2013 if Congress does not address the ongoing fiscal crisis and actively reduce the country's debt-to-GDP ratio.
According to recent analysis by the non-partisan Congressional Budget Office (CBO), the U.S. federal budget deficit for fiscal 2012 will hit $1.1 trillion, topping the $1 trillion mark for the fourth straight year.
At the end of fiscal 2012, which concludes Sept. 30, U.S. government debt will grow to its highest level since 1950, or 75% of GDP. That is almost double the total amount of public debt recorded in 2007.
It's been just over a year since Standard & Poor's downgraded America's triple-A debt rating. In that time, little progress has been made on U.S. government budget matters while the country heads closer to the fiscal cliff, i.e. when $1.2 trillion in automatic tax increases and spending cuts will take effect on Jan. 1, 2013.
In a new report entitled "Update of the Outlook for the US Government Debt Rating" Moody's said:
"Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the US government's Aaa rating and negative outlook.
If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable.
If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1."
The Daily Ticker's Aaron Task sat down with David Stockman, former Reagan budget director, who says the Moody's threat is "a day late and a dollar short."
"It is a foregone conclusion that our credit ratings are going to be downgraded much much further because we cannot cope politically with the fiscal cliff that is looming," says Stockman, who is also the author of the forthcoming book, The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy.
Many economists believe the automatic tax hikes and sequester will thrust the U.S. economy back into recession. That's why there is an urgent outcry for politicians to delay or deal with the fiscal cliff before 2013.
Stockman, however, believes otherwise. He says the country would be better off in the long run if it jumped right off the so-called cliff.
"We are living way beyond our means," he says. "No one deserves these tax cuts. No one."
He argues that if America makes some hard choices and sacrifices now, it will lead to greater economic prosperity a few years down the road.
"[The fiscal cliff] will throw the economy into recession. We will struggle for a couple of years," he acknowledges. "But we will come out with some better fiscal balance on the other side."
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