Tuesday, August 9, 2011

Why Our Credit Rating Was Downgraded

Simply put, this is why credit agencies are beginning to distrust the American government's ability and willingness to pay back its debt in the long term. Robert Reich is not some random leftist political blogger; he is a former Secretary of Labor. When people who have been entrusted with high power in this nation are saying we ought not deal with the massive amount of debt we are under until it crushes us, credit agencies have good reason to be fearful of our financial sanity.

Consider Reich's analogy in the first two paragraphs. Basically, it's all wrong. One faction, the Tea Party, is refusing to turn on the hoses because the faction in power (the Left) refuses to deal with the long term water shortage problem, but they did manage to find water to fill an Olympic sized swimming pool which they named the Stimulus.

Reich's entire position is, we'll deal with that massive debt crisis when it hits. It is almost unbelievable that anyone would take that position. Let me use a different analogy to explain why: imagine the country is a canoe on the Niagara River. One of the paddlers, the Tea Party, is saying we need to go on shore now rather than move closer to the Falls. The other paddler, the Reich leftists, says that's a "long term problem" that can be dealt with later and isn't worth putting off fun now for.

Here's the problem: at some point, the current will become so strong that even if the paddlers turn around and go full steam, the current will still carry them over the Falls. We don't know where this point is, other than that it exists at some point before we actually go over the Falls.

The Tea Party risked a short term but large cut in government spending with the debt ceiling debate. The Left, on the other hand, is risking catastrophic economic collapse within the next decade. If you look at the deal reached, no significant cuts are made. We're staying in the canoe and moving to the point of no return.

S&P is the lifeguardish figure in the analogy. Their sole goal is to warn when people are acting irresponsibly. I think it is justified that they would be blowing their whistle right about now.

Reich goes on to mention that European nations are actually past that point of no return and are going to go over the Falls. Amazingly, he then goes on to say that America has plenty of money and won't ever find a point of no return. Our debt is now over 100% of the GDP, but we have plenty of money, apparently! Yes, we could pay off our debt, but it would bankrupt our nation. The same could be said of those European nations if they were willing to bankrupt their citizens. They're not, and neither will we be.

Probably the biggest concern I have here is that Reich honestly seems to think more government spending will somehow improve the economy. The United States has increased its spending by 30% in three years, jobs have disappeared, economic growth has been anemic at best, but Reich thinks yet more spending (and more debt) will solve our problem, all of this in light of Europe's debt implosion.

The American Left is out of bullets. They tried spending incredible amounts of money to stimulate the economy, but in fact it actually backfired and made things worse. Rather than admitting that they were wrong, this faction has opted to scream at the Tea Party for trying to deal with a very serious and very real debt problem that will overtake us in the next decade if we do not change course immediately. Since the day dreamers have the Senate and the White House, no long term solution (which, admittedly, will be painful) is possible. We have a party that believes tomorrow's apocalyptic problems should be put off until the day after tomorrow. That is why S&P downgraded our credit rating.

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