Credit rating agency Egan-Jones downgraded the U.S. debt rating on Friday 9/14/2012 from AA to AA-. A U.S. credit downgrade has only occurred twice in history, and both occurred under the Obama administration.
This credit downgrade is an ominous warning which is being ignored by most major media outlets but a warning we should not ignore. The reason cited for the downgrade was the Fed’s recent QE3 action.
The simplest why to describe QE3 (quantitative easing for the third time) is increasing government debt by printing more money to be infused into the economy. This is accomplished by “buying” government securities adding an additional $40 Billion to the National Debt.
If you look at this on an individual level, the scenario is this; when you accumulate more debt without reducing your expenses (cutting your budget), the greater risk you become to your creditors, i.e. you become subject to a credit downgrade.
The greater the risk you become, the more interest you will be required to pay to accommodate that risk. Say you owe $16,000 in credit card debt and the interest rate on that debt is 4% or $640 a year, you now owe $16,640 by virtue of the interest alone.
Now assume in six months you need another loan but you have only paid back $240.00, leaving a current balance of $16,400. This time your creditor see’s that even though you are paying the money back, your debt is still increasing.
So you are able to borrow $2,000 bringing your total to $18,400. But this time your interest rate is 5% because you are a greater risk. And now the amount owed is $19,320. This should serve as a stark warning; and there are only two things that you will eventually have to do:
1. Stop borrowing, suck it up, and pay off what you owe.
2. Increase your payments to pay off the debt faster. But this can only be accomplished by increasing your income, eliminating some expenses from your monthly budget, or a combination of the two. How possible is increasing your income in this economy going to be?
If you choose neither, then you will go bankrupt.
Now return this scenario to the National Debt which currently stands at just over $16 Trillion, and we are increasing that amount by $1.2 Trillion a year. The interest rate on the current debt is around 1-1/4%. Using July 2011 numbers the payment on that debt is roughly $230 Billion a year or about 10% of current tax revenues.
Remembering if you become a greater credit risk, then the interest rates go up, so if the current National Debt goes up another 1% then the amount of money required annually to service that debt (interest payments) will balloon to over $400 Billion a year or almost 20% of current tax revenues. If we continue on this path the amount of money required just to service the debt by 2020 will reach over $700 Billion a year.
If this happens, severe budgets cuts will be forced into effect and everyone on the receiving end of government benefits will feel the pinch. Everyone on the paying end will be forced to pay more, and this forced action will not be pleasant.
One need only to see what has happened in Greece, and now in Spain when harsh austerity measures are put into place.
It would be far better for the U.S. to suck it up and pay the debt down now while we still have a choice on how to fix it instead of becoming Greece. President Obama insists that the rich be forced to pay a little more, yet he has offered no real spending cuts (we are spending more this year than last).
Remember, the National Debt is money we all owe. The worst part is we owe it to other countries. With the Obama Administrations refusal to cut spending, and the impending crisis, doesn’t indicate he truly cares about saving America’s economic future.
Right now, interest rates have been held in check because of Europe’s economic woes, leaving the U.S. the safest place for other countries to invest in, but the growing amount of debt is beginning to slow overseas investments. If foreign investment wanes much more, the Fed will be forced to raise interest rates to attract those investing countries.
Answers given by President Obama to questions asked by David Letterman during an appearance on Letterman’s show on Sept. 18, 2012 are alarming and reflect President Obama’s total lack of concern for the National debt problem.
When asked By David Letterman “what was the debt when you took office around $10 Trillion?” Obama said “I don’t remember what the number was precisely.”
Why would he not know? I would submit to you – he doesn’t care.
Obama continued “We don’t have to worry about it short term right now interest rates are low…but it is a problem long term.”
I would submit this attitude reflects a total lack of concern for the economic future of this country. If nothing is done very soon, and we wait until the ‘long term’ it will be too late to turn things around.
Of all of the things American’s want to see changed and/or accomplished, none of them will ever happen if we are broke. The future of our economy is in jeopardy. The economic future of our children is at risk. It is truly all about the economy.
We have been warned – twice!