Last week the financial
markets were roiled by Standard & Poor's announcement that they will
change their outlook on the fiscal health of the United States over the next
two years from "stable" to "negative". The administration
decried this decision as political. However, it seems the only political
thing about this decision is the fact that it took so long. The Washington
Post recently reported that the White House and the Treasury Department put
tremendous pressure on S&P not to do this. However, if S&P made its
ratings based on political pressures rather than economic reality, it would
cease to have any relevance to the business community. Even if S&P
delayed its announcement that U.S. government bond market would be
downgraded, at some point it would become obvious that the finances of this
country are out of control and our leadership is out of touch. All
credibility would be lost if S&P simply continued to assign U.S. debt a
AAA rating.
S&P noted in its
announcement that negotiations among leaders in Washington to address deficit
concerns did not sound promising, and expressed skepticism that politicians
could agree to any viable budget compromise. Of course this has been obvious
for years but in the midst of the current debate over raising the debt limit
it is perhaps the wake-up call that Washington needs. For decades politicians
and government officials have been able to maintain their denial about our
real financial situation, patching the system together by passing emergency
and supplemental funding bills, issuing more debt, and allowing the Federal
Reserve and foreign creditors to paper over deficits with more monetary
expansion. I've said many times the real day of reckoning comes when fiscal
and monetary tricks no longer work and there are no buyers for our debt.
Even the most conservative
budget that has been proposed by Republican leadership requires raising the
debt ceiling by an additional $9 trillion by 2021. This demonstrates
absolutely that no one in power right now has any real intention of
addressing our spending problems or paying down the debt. They simply expect
to continue to borrow and run up more debt forever, without limit. Yet they
always imagine our dollar will have value no matter how many we print. This
expectation is foolish and naïve. I guarantee that those buying our debt are
not foolish and naïve enough to go along with this charade forever.
The S&P announcement may
just be the harbinger of economic realities acting as a restraint on
government expansion. Government is not anxious to cap its own growth, in
spite of misnomers like "debt limit" or "deficit
reduction". Government will continue to grow like a cancer, sapping our
country of its wealth and freedom until the laws of economics no longer can
be ignored.