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News Link • Government Debt & Financing

Debt Downgrades: Here It Comes

09:36 15Jul11 RTRS-S&P PLACES U.S. 'AAA/A-1+' RTGS ON CREDITWATCH NEGATIVE 09:37 15Jul11 RTRS-RPT-S&P PLACES U.S. RATINGS ON CREDIT WATCH NEGATIVE 09:38 15Jul11 RTRS-S&P SAYS AT LEAST A 1 IN 2 CHANCE IT COULD CUT RATING 09:38 15Jul11 RTRS-S&P SAYS POLITICAL DEBATE ON DEBT CEILING A SIGNIFICANT UNCERTAINTY 09:39 15Jul11 RTRS-S&P SAYS SEES INCREASING RISK OF POLICY STALEMATE 09:39 15Jul11 RTRS-S&P SAYS COULD LOWER U.S. RATINGS WITHIN 3 MONTHS 09:39 15Jul11 RTRS-S&P SAYS MIGHT CUT RATINGS BY 1 OR MORE NOTCHES IN AA RANGE 09:39 15Jul11 RTRS-S&P SAYS BELIEVES RISK OF PAYMENT DEFAULT SMALL BUT INCREASING The danger is right there in the bold. This is not about the "ceiling." It is about fiscal sustainability. Here is the text of the salient section from S&P as reported by Reuters: -- We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future. There it is. Folks, it is time to cut the crap. We must cut the growth of government debt to below the growth in GDP. Since at present the government is providing ~12% of GDP via borrowing, this means we must cut federal spending by something closer to 15% of GDP, since GDP will contract when we do this (it's the math, and is inescapable) and debt must shrink faster than GDP does, or grow slower than it does. Incidentally, that means we must cut federal spending approximately in half, double tax receipts (not rates), or some combination of the two that adds to the same figures.

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