Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Uncle Sam Busted, The S&P U.S. Debt Rating Announcement

Interest-Rates / US Debt Apr 21, 2011 - 12:25 PM GMT

By: Robert_Murphy


Best Financial Markets Analysis ArticleOn Monday, Standard and Poor's (S&P) announced that although the US government would retain its AAA debt rating, the outlook for the United States' future was being downgraded from "stable" to "negative." The move is a welcome if tepid acknowledgement of the fiscal train wreck of which Austrians have been warning for years.

The S&P Announcement

The formal announcement of the downgraded outlook cited the federal government's growing debt burden:

Standard & Poor's on Monday downgraded the outlook for the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.

"Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable," the agency said in a statement.

In an interview with CNBC, David Beers, S&P's global head of sovereign ratings, said the agency has been "struck increasingly by the difference in how other governments are dealing with fiscal consolidation."

"The U.S. to us looks to be an increasing outlier in that context," Beers added.

The White House tried to spin the news as an endorsement of the budget talks and of the fiscal approach laid out in President Obama's recent speech. But even the allegedly "radical" Paul Ryan plan is grossly inadequate to grappling with the looming fiscal crisis.

The Ryan Plan Isn't "Serious"

For once, I agree with Paul Krugman: the Paul Ryan budget plan doesn't deserve the adjective "serious," no matter how many pundits christen it as such. The politically painful budget slashing is deferred to the future. As Lew Rockwell has said of any would-be budget hawks, tell me how much you want to cut spending this year — not ten years from now when someone else will be in office. (On that score, Rand Paul's proposal is far more serious than Paul Ryan's.)

Despite all the talk of how "savage" the Ryan budget cuts are (when described by critics) or how it "puts the country on the path to fiscal sanity" (when described by friends), in reality the plan does neither. Yes, the Ryan proposal is certainly better than the long-term budget plan put out by the Obama White House, but that's like saying Darth Vader is a pretty nice guy compared to the Emperor.

I don't need to scour left-wing blogs to demonstrate just how moderate the Ryan plan is. We can reproduce a chart and crucial line from the Ryan plan itself:

Commenting on the above figure, the Ryan proposal says:

According to the Congressional Budget Office, this budget charts a path to complete balance. By 2040, the CBO estimates that this budget will produce annual surpluses and begin paying down the national debt. (p. 57)

To be clear: The Ryan plan — even using its own numbers — has the federal government running a fiscal deficit this year, next year, the next year, and so on, until about 2038. So under the Ryan plan's own rosy forecast, the federal budget won't actually be balanced for almost three decades. Does that strike most readers as "savage" budget cutting that recognizes the fiscal emergency upon us?

For another demonstration of the halfhearted urgency of the Ryan plan, consider Table S-1 (p. 62) from the appendix:

When evaluating the above numbers, keep in mind that the scenario modeled in these projections does not assume that, say, the world dumps the dollar five years from now and interest rates spike. Yet even absent such bumps in the road, the Ryan plan nonetheless calls for adding $5.1 trillion to the federal debt held by the public over the next ten years — an increase of 45 percent from the assumed starting level in the fiscal year 2012. You don't hear too many fans of Ryan couching it in these terms.

The Cash-Flow Deficit Isn't Even the Main Problem

By focusing on the projected cash-flow deficits and accumulation of explicit Treasury debt held by the public, we actually play into the government's smoke and mirrors. The real fiscal crisis is due to the demographic shifts that will make the current configuration of Social Security and Medicare simply untenable.

In contrast to the current outstanding Treasury debt (held by the public and government agencies) of some $14 trillion, the government's own actuaries estimated that as of January 2009, over a 75-year horizon, the various Medicare and OASDI programs were unfunded in present-value terms by about $46 trillion.[1]

Unfortunately, this estimate is probably far too optimistic; credible analysts have placed it higher than $100 trillion. And now we see why the Ryan plan — which only balances the cash flow deficit by the late 2030s — is hardly adequate. Tom Woods explains in his latest book, Rollback:

[The cash flow deficits,] staggering as they are, do not reflect the impending problem posed by the unfunded liabilities of Social Security and Medicare. Even if the federal budget were balanced [immediately] and the deficit reduced from over $1 trillion to zero, when we factor in the unfunded liabilities problem, the U.S. government would still fall further into the hole by $2 trillion to $4 trillion a year (p. 6).

Now it's true that the Ryan plan purports[2] to rein in escalating Medicare expenditures, but the pattern is the same: the difficult choices only affect future politicians. The Republicans are not daring to tell voting seniors that their benefits will be cut today. As the quotation from Woods underscores, we can't wait another decade before really "getting serious" about the problem.


S&P's downgraded outlook for US debt is one of many objective signs that those of us warning of a fiscal crisis aren't crazy. The federal government is digging itself deeper and deeper into debt at an alarming rate. Although the budget proposal put forth by Paul Ryan is better than that of President Obama, it is nowhere near a solution.

Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy's article archives. Comment on the blog.

© 2011 Copyright Robert Murphy - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules