Moody’s characterized the present threat to America’s Aaa rating as small. Japan may have thought its sovereign rating was solid as well. S&P disapproved of the notion and dropped its rating from AA to AA-. The capital markets reacted badly. Without a Herculean effort to cut costs, Japan may not recover its financial footing for a decade. That happened during the end of the last century, so there is recent precedent for national debt problems in Japan.
There really is not a precedent for the current debt and deficit trouble in the US. The deep recession, the need for stimulus, and a collapse of the increase of government tax receipts collided to take the American budget deficit to nearly $1.4 trillion last year. The CBO reports that number could be closer to $1.5 trillion this year. The cuts that the Administration plans to make to defense and discretionary spending are modest. Even the Republican plans to strip $100 billion out of the federal budget will not solve the deficit problem
The US is doomed to suffer a downgrade in its debt before its begins the hard work on restructuring Social Security, Medicare and Medicaid. A downgrade may not even be enough of a shock to bring Americans to their senses. They have paid for their entitlements and they believe they deserve them.
There is nothing novel about the idea that a credit downgrade may be the catalyst for a move to austerity, not on the scale of Ireland or Greece, but on par with anything the US has had to do in a number of decades. Austerity, unfortunately, will have to be forced on America. It cannot, or perhaps will not, read the writing on the wall.
Douglas A. McIntyre
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