Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Life Sciences Biotech Smaller Cap High Risk Stocks Investing Binge - 24th Jun 21
Central Banks to Keep Buying Gold - 24th Jun 21
Will Gold Survive Hawkish Fed? - 24th Jun 21
The Clean Energy Compound That Could Change The World - 24th Jun 21
Everybody's Getting Rich (and Having Fun) Except Me - 24th Jun 21
WESTERN DIGITAL WDC Stock Trend Analysis - CHIA! - Risk 1 - 23rd Jun 21
AMC Is the Best-Performing Stock in America: Don’t Buy It - 23rd Jun 21
Stock Market Calling the Fed‘s Bluff - 23rd Jun 21
Could Bitcoin Price CRASH Target A Bottom Below $7500? - 23rd Jun 21
Bitcoin and cryptos: Your 'long-term investment'? - 23rd Jun 21
Unlocking The Next Stage Of The Hydrogen Boom - 23rd Jun 21
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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