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AA+…but not for long

When the S&P Friday downgraded the U.S. credit rating it brought mixed reactions. The reactions ranged from “this is deeply flawed” to “why did this happen?”

 To anyone who has any economic sense at all, this downgrade was expected. And it probably will not be the last downgrade.

All of the rhetoric from the left indicated that if the debt ceiling was not raised the downgrade would happen, but if we “came together” and “compromised” we could get our financial house in order and avoid the downgrade.

Once again, the warnings and promises of this administration were completely false. Well, we came together, compromised, and still got the downgrade.

Let’s break this down and illustrate what happened and why.  We are going to use numbers that are actual amounts, but made smaller (by deleting some zeros or decimal places if you prefer).

Just a little role play should suffice, but it will require you to do 2 things:

First, set your political hat aside and put on your business one.

Secondly, imagine yourself as a loan officer at a bank and the U.S. government is your customer.

The U.S. government has been a long time customer of yours, has borrowed a lot of money from you, and made their payments to you on time. They have for many years had the ability to produce enough (GDP) to easily pay back the amount borrowed as well as the interest on the loan.

But over the past 2-1/2 years you have noticed that the amount of money they owe you is growing rapidly and they continue to borrow.

They came to you in Jan 2009 and ask to borrow $1000.00. You took note that they already owed you $9,654.

Naturally, you ask what the money is going to be used for. You are told it’s for making your employees more efficient so as to generate more revenue, and to have enough operating capital to get you over the hump.

So you decided the U.S. government was still a safe investment (AAA rating) and the loan may help them get back on their feet and begin to pay back the money they owe you.  So you extend their line of credit to $10,654.

In one month they spent most of the money and now owe you $10,413. Six months later they have reached the credit limit you agreed to, but need more money.

This trend continues for 2-1/2 years, and now they owe you $14,571.

Wouldn’t you want to know what they did with the money and why they aren’t being profitable?  After all it’s your money, you loaned it to them. So as a good loan officer you ask.

This is the summary they present:

We gave some of the money to other businesses that lost all of their employee’s savings through poor investments (Federally backed union pension funds).

We gave some of the money to employees who aren’t working (unemployment for the past 112 weeks).

We gave some of the money for free college educations (pell grants).

We wanted our employees to have free healthcare.

We bought an unprofitable car company and made someone else buy one too.

We helped our employees buy new cars so they could save money on gas.

We have a record number of give-away projects that cost the company money, but it’s the socially just thing to do.

Oh, and we had to hire more people to give all of this money away.

Naturally you have a few more questions:

Is your business growing, is it producing a profit so I can get my money back? No.

Have you made any cuts in operating costs to make a profit? No.

Have you eliminated any employees? No.

Have any members of your staff taken pay cuts? No.

Do you have a written business plan for this year or next year? No.

Wouldn’t you at this point consider the U.S. government a greater risk than they once were? Of course you would.  Wouldn’t you be a little less excited about loaning them more money? Of course you would.

These sentiments are reflected by a credit rating.

In 2-1/2 years our debt has grown 64% to $14.5 Trillion. We are rapidly reaching the point when we will be unable to produce enough (GDP) in a year to pay back what we owe.

We have a CEO (the president) and a board of directors (the congress) who have continued to spend far more than they are taking in, and rather than cut expenses, they continue to borrow.

In their effort to help everyone, they are going to bankrupt everyone.

Play politics all you like, but business is business. If you think this administration is running their business properly, then follow their example – and run your household like they do. In a year from now drop me a line and tell me how you are doing financially.

 

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