Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.
It finally happened. Last week, one of the big bond rating agencies, Standard and Poor’s, put a “negative” watch on U.S. government debt. This is the first time the good old US of A isn’t AAA-rated with a “stable” outlook.
How long can we spend $1.40 for every $1 we bring in? According to S&P, the chickens will come home to roost as early as 2013 if Washington doesn’t start getting our nation’s finances in order.
The credit watchdogs are rightfully worried the right and the left won’t come to an agreement to reduce deficits until it’s too late, resulting in a possible downgrade of our actual bond rating, from AAA to AA, and not just a downgrade in the “outlook.”
Among the stunning numbers behind S&P’s downgrade:
• Total outstanding public debt: $14.26 trillion, aka $14,260,000,000,000.00. That’s a lot of zeros.
• GDP in 2010: $14.66 trillion. That means debt constitutes 96.3 percent of our annual gross domestic product.
• Fannie Mae and Freddie Mac obligations: $5 trillion
• Social Security’s unfunded obligations: $7.7 trillion
• Medicare/Medicaid’s unfunded obligations: $38.2 trillion
• Combined total debt and unfunded obligations: $65.56 trillion
You might think all this would induce a global panic. But the price of Treasury bonds actually rallied after S&P’s downgrade. Here’s why:
1. The downgrade is the wake-up call politicians and Americans needed. Now that our credit rating is officially in jeopardy, there is no way to keep avoiding the topic, especially in the upcoming 2012 election.
2. Our monetary system is very flexible. If the government has to cut spending (subsidies and social programs), the Federal Reserve can help the economy by keeping interest rates low and money flowing. Think an extended QE2, the Fed’s current program to stimulate the economy.
3. Of our total debt and unfunded obligations, 79 percent is based on projections of future spending, mostly on social healthcare costs. No politician wants to be known for cutting healthcare benefits, but they eventually must, or risk a crisis far worse than in 2008 when most of Wall Street was on the brink of collapse.
4. As the economy and corporations continue to recover, hiring will pick up. New jobs mean new tax revenue, and that’s good for everybody: Washington, Wall Street and Main Street.
My bottom line: The government is absolutely, 100 percent not going to default on its debt.
Your turn: Will Washington turn it around in time? How much does the debt crisis factor into your personal or business financial planning?
– By Wes Moss, for Atlanta Bargain Hunter