Downgrading the U.S. Debt

The prospect of higher interest rates on government debt should cause us to reassess our national spending.

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Both Standard & Poors and Moodys have placed U.S. debt on credit watch for a possible downgrade. The timing of the downgrade is uncertain but most economists believe the rating agencies would make the move within 18 months.

It is important to keep in mind that the credit rating and debt ceiling were separate issues. The credit rating of U.S. debt could be downgraded even though the debt ceiling has been raised. That is because raising the debt ceiling without a substantial reduction in future government spending would be seen as irresponsible. The immediate impact of a debt downgrade would likely be higher interest rates on government debt. Over half of the U.S. debt matures in less than 5 years. As these notes mature they will be renewed at the higher interest rates. In addition, the U.S. is adding to the debt in the form of our budget deficit at the rate of $1.3 trillion per year.

Bloomberg Government estimates a 1 percentage point increase in long-term borrowing costs and a 0.18 percent decline in annual GDP growth would lead to debt increasing to 93.4 percent of GDP by 2020. For a point of reference, Greek public debt was 143 percent of gross domestic product at the end of 2010. A simpler way to look at it is that 1 percent of the $14.5 trillion national debt is $145 billion of additional mandatory government spending.

Let’s hope our leaders in Washington pay attention to the rating agency’s warnings and put the U.S. on the path to living within its means. No one can continue overspending without ending up in financial ruin. That’s not the direction we would take for our personal finances and it’s not the direction we want for our country.

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