Too Big to Bail? | Brevis from Bob Ewoldt

Too Big to Bail?

This week, S&P downgraded the United States’ sovereign debt credit rating outlook from “Stable” to “Negative.” This means that, while the current credit rating remains at “AAA” (as it’s been forever), S&P expects that the United States will be unable to deal with its debt crisis, and the rating is likely to go down in the next two years.

Here’s a quote from the S&P report: “In 2003-2008, the U.S.’s general (total) government deficit fluctuated between 2% and 5% of GDP. Already larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11% in 2009 and has yet to recover.” So, because our deficits have increased over 100% in the past two years, and show no signs of decreasing (due to new spending that’s planned by the Obama administration and the perceived inability of Congress to arrive at a plan that would bring down the debt), S&P thinks that eventually, they’ll have to lower our credit rating.

The primary reason that there will be no deficit and debt plan enacted in the next two years is because the next two years are campaign season. Only one out of every four years is actually productive in Washington, because there’s only one year in four in which (a) the President, (b) the House, and (c) the Senate are not running for re-election.

However, if a debt and deficit plan is NOT enacted, the United States is in big trouble. When we reach the point where no one left standing is willing to lend money to us, what do we do? In the cases of Greece, Portugal and Ireland (which I addressed in another post here), they appealed to the international community, which put together an emergency debt package to bail them out in their time of need:

Greece: $522 billion in debt / $160 billion bailout
Ireland: $2.2 trillion in debt / $90 billion bailout
Portugal: $498 billion in debt / currently applying for aid
United States: $14 trillion in debt

Two questions: (1) Do you really think that, were the United States to default on its debt, the international community would rise to our aid? (2) If they were to come to our aid, would they be able to give us enough significant aid? Would the world community be able to give us a bailout? In order to give us the same level of aid as Greece, they would have to give us $4.3 trillion!

Question: Is the United States too big to bail out?

http://brocmiddleton.blogspot.com/ Broc

CNN’s Fareed Zakaria has a total different take.

http://cnn.com/video/?/video/bestoftv/2011/04/24/exp.gps.fareed.take.cnn
- http://brocmiddleton.blogspot.com/ Broc
  
  Another story along the same lines:
  
  http://finance.yahoo.com/news/How-SampPs-warning-could-apf-2670201592.html?x=0
- Bob
  
  That was interesting… and a little troubling. Fareed seemed to say, at the beginning of the clip, that S&P was wrong to lower the outlook, because the market the next day lowered the borrowing cost for the U.S. He said that “America does not face an immediate debt crisis.” But then, toward the end of the clip, he said that the fact that the U.S. economy is improving is only pushing out the inevitable collapse and hard decisions. Here’s what he said then: “This short-term good news is that Washington isn’t really acting like it faces a crisis… the current system is clearly unaffordable… the U.S. economy will outperform expectations and temporarily relieve politicians from the need to make hard choices about entitlements and taxes.”
  
  He acknowledges that there’s a problem at the end, after downplaying the crisis at the beginning.
http://brocmiddleton.blogspot.com/ Broc

I think these people just like going the opposite of conventional thinking just to be different, to get a different point of view out there. All that is fine for a balanced debate but don’t lead people who watch your show or read your column to misunderstand the real facts when you saying there is no crisis that is just irresponsible.