The ratings agencies couldn't be more clear about the message they have sent to Washington, D.C. There are three distinct outcomes on the table for the U.S. credit rating, according to Standard and Poor's, and each scenario is tied directly to the actions of the leadership in the White House and Congress.
Possible Outcomes for the Current Debt Impasse in Congress
- Get your act together now, and we'll take you off credit watch.
- Raise the debt ceiling without a credible long-term plan and we'll downgrade you -- and fast. Within weeks. In early August.
- Let the U.S. default on its debt and you'll push the U.S., and the world, back into the Great Recession.
By the publication of this article, Congress may have raised the debt ceiling. However, the future of the United States requires more than that, and lies in the hands of your elected officials. And what the elected officials have been instructed to do (by the rating agencies) requires give and take on both sides of the aisle. So, if you want them to do the right thing, be sure to send them an email today that says something to the effect of:
If Congress does not create a credible debt reduction plan, the U.S. credit rating will be downgraded. The rating agencies have been clear about what they believe is a credible plan, and you are aware that this includes concessions on both sides of the aisle. So stop the politics and cut $4 trillion from the budget, to be implemented over the next 10 years.
Below is a breakdown of what the rating agencies want to see, in order for the United States to maintain an AAA rating and be taken off of Credit Watch.
Long Term Budget and Debt Reform
According to David T Beers, Beth Ann Bovino and Curtis Moulton of the Standard and Poor's Sovereign Debt team, "If the opposing camps agree to raise the debt ceiling before the deadline and come to terms on a long-term debt-reduction plan, Standard & Poor's would likely affirm the U.S. ratings and remove them from CreditWatch." Of course, the rating agencies will have to be assured that the plan will actually be implemented in a timely fashion as well.
What does that credible plan look like?
Government Spending Has to Continue for now
According to Standard and Poor's, "Any significant slowing of government spending would have generally negative implications for the economy broadly." Spending must be cut, but not at the expense of GDP growth. So the Stimulus Plan should remain in tact for now. Once the recovery is on more stable ground, then government stimulus can be moderated.
Moody's (another rating agency) "does not take a position on what measures should be included in any deficit reduction package." However, in order "to retain a stable outlook," the U.S. needs "a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years," according to the rating agency. As you can see clearly from the interactive budget map on the White House's Office of Management and Budget website, government spending is concentrated in four main areas -- Medicare, Medicaid, Social Security and Defense.
Nobel Prize-winning economist and University of Chicago professor Dr. Gary Becker advocates gradually increasing the age for Social Security to age 70, which he says is "not an unreasonable age with modern health." Dr. Becker would make Medicare means-tested. He would give the states block grants for Medicare. And he would wind down the war in Afghanistan. Click to read more about Dr. Becker's Roadmap for the U.S. Recovery, on another one of my HuffingtonPost.com blogs.
Standard and Poor's baseline scenario includes a "post-2012 phase-out of the December 2010 extension of the 2001 and 2003 tax cuts." If the tax cuts remain in place now, it is generally agreed by economists that this will help to keep the tenuous economic recovery pushing forward. Having a post-2012 phase-out also means that Congress is serious about balancing the budget and reducing the debt. Of course, there are many economists, including Dr. Becker, who believe that a major reform of the tax code is in order. Dr. Becker would make the tax base flatter and the income base wider. According to Becker, "That would be lower taxes for most people, higher taxes for some people and generous no taxes for lower-income people."
GDP Growth needs to be near 3% for the U.S. to start making gains on the debt-to-GDP ratio. The current projections from the Federal Open Market Committee board members are GDP growth of 2.7-2.9% for 2011. On June 24, 2011, the projections for 2012 and 2013 were 3.3-3.7% and 3.5-4.2%, respectively. Budget reform has to include provisions that will fuel economic growth, moderate oil prices (which killed GDP growth in the 1st quarter of 2011) and strengthen the dollar.
The magic number that Standard and Poor's and Moody's credit rating agencies want to see is budget savings of $4 trillion phased in over 10-12 years. And they want to be assured that the agreement will be "enacted and maintained."
If the U.S. defaults or if the credit agencies downgrade the U.S. credit rating, the interest rates this nation will have to pay on its existing debt will become suffocating. President Obama has rightfully called this a "tax" on the American people.
The stakes couldn't be higher. If Congress fails to act quickly to raise the debt ceiling and implement $4 trillion in budget savings over the next ten years, the ramifications will be dire - and not just for the U.S., but for all of our international partners, suppliers and customers around the world.
Congress understands clearly that a default or downgrade will thrust the U.S. back into a recession. Equity markets will plunge. Interest rates will soar. The value of the dollar will drop another 10%. Oil prices will spike again. And consumers and businesses will stop spending.
It's hard to imagine that the politicians would do that to the American people. Standard and Poor's borrowed a quote from Winston Churchill to sum up their belief that Congress will, at the last hour, do the right thing, writing, ""The Americans can always be counted on to do the right thing...after they've exhausted all other possibilities."
Let's hope that's the case.
About Natalie Pace:
Natalie Pace is the author of You Vs. Wall Street and the founder and CEO of the Women's Investment Network, LLC. She is a blogger on HuffingtonPost.com and a repeat guest on national television and radio shows such as Good Morning America, Fox News, CNBC, ABC-TV, Forbes.com, NPR and more. As a philanthropist, she has helped to raise more than two million for Los Angeles public schools and financial literacy. Follow her on Facebook.com/NWPace. For more information please visit NataliePace.com.