The US Will Be Downgraded

07-29-2011 • Market-ticker.org

or perspective: That means cutting the deficit by more than one trillion dollars a year at present run rates. And that's not enough either. GDP will contract dollar for dollar as the deficit spending comes off and taxes will contract too, which means that the actual cut in spending (or increase in taxes) will be have to more that one trillion a year. It does not matter how that difference between revenues and spending comes off. It does not matter if you cut spending, raise taxes or some combination of the two. The GDP impact is inescapable as is the tax receipts impact. But so, at this point, is the downgrade. The "most-recent" proposals cut anywhere from nothing in actual spending (Democrat proposal) for 2012 to $90 billion (Republican.) And neither contains any actual cuts on a forward basis - the Republicans are at least honest about it and say they just "hold discretionary non-defense spending at 2011 levels." That's not a cut in spending. So here's how it's going to go down. We will get downgraded, probably within days or weeks after this "short-term" blip passes Congress, however it does. And when we do, interest rates will ratchet, at least a bit. If the Congress refuses to respond to that downgrade with real budget cuts including the cost of the increased interest now, which means they have to be another $100 billion or so (that is, 10% more than if they did it now) we'll get downgraded after a period (probably six to twelve months) again. Note: I'm talking one trillion a year in cuts and/or tax receipt (not rate) increases. Not over ten years, per year.