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August 7, 2011 9:47 am

S&P Downgrades US Credit Rating

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WSJ – Standard & Poor’s unprecedented decision to strip the U.S. of its top credit rating was the downgrade heard around the world. S&P downgraded long-term U.S. debt to AA+ and put the new grade on “negative outlook,” meaning the U.S. could be downgraded again in the eighteen months to two years.

Friday night’s move dramatically showed that the unit of McGraw-Hill Cos. no longer believes long-term U.S. government debt is among the very safest investments in the world. S&P also veered away from its reputation during the financial crisis, when critics said the firm lost its independence.

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  • Rocky

    Although many people disagree with the downgrade, from economist Robert Reich on down, I think we will see more downgrades in the coming months or next few years at the latest. The US government has been living beyond its means for years, even though the financial situation was staring to improve towards the end of the Clinton administration.

    Two wars and two income tax cuts have significantly weakened the country’s financial picture and the unwillingness of Congress to deal with the problem is not good. In the end, a major financial crisis may force the government to not only cut sacred programs such as Social Security, Medicare and foreign aid to the Middle East, including financial assistance to Israel, but to raise taxes as well. The longer Congress takes to get its act together, the more painful the changes will be. Religious Jews with large families should not assume that Uncle Sugar’s largess will flow to their communities forever (in the form of food stamps, Section 8 vouchers, Medicaid or Israeli government subsidies made possible by the fact that the US is picking up part of Israel’s defense costs). It would be better for them to look for real jobs and to encourage their children to develop good job skills.

    Economist Lawrence Kotlicoff of Boston University has calculated the US government’s fiscal gap including not just outstanding bonds but also Social Security, Medicare and other commitments to be about $211 trillion. That is the discounted present value of the government’s commitments less the discounted value of expected revenues. This number is about 15 x the current national debt figure usually published in the news media.

    Houston, we have a problem.