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S&P: US Needs $10T Cuts For Debt/GDP Ratio

From Reuters:

S&P: Deficit cuts of $4 trillion a good start

By Walter Brandimarte and Daniel Bases – Thu Jul 28, 2011

NEW YORK (Reuters) – Cutting the U.S. deficit by some $4 trillion over 10 years would be a good start, but more savings would be needed over time to bring the country’s finances under control, ratings agency Standard & Poor’s said on Thursday.

John Chambers, the chairman of S&P’s sovereign ratings committee, said deficit cuts of that magnitude "would signal the seriousness of policymakers to address the fiscal position of the United States."

His comments, made during a conference call with clients, suggest S&P would probably be convinced to keep U.S. ratings at AAA if lawmakers were to show commitment to solving the debt problem with bold deficit-cutting measures.

Chambers added, however, that $4 trillion in savings, "depending on whether it was frontloaded or backloaded, is not going to do the trick in terms of stabilizing the U.S. government debt-to-GDP ratio.

That ratio, which measures the country’s debt load against the size of its economy, is one of the main factors considered by ratings agencies on deciding on a rating. It depends on cutting the deficit as much as it depends on economic growth.

And we are having next to no economic growth, by the way.

Chambers noted that, according to the International Monetary Fund, the U.S. government would have to come up with savings of about 7.5 percent of its gross domestic product to actually stabilize its debt-to-GDP ratio.

"I think we have it a little more than that, but $4 trillion would be a good down payment," he said, referring to the figure originally proposed by the Simpson-Bowles deficit commission and embraced by President Barack Obama in April.

Savings equal to 7.5 percent of U.S. GDP would represent around $1 trillion a year.

The Reuters reporters don’t seem to be able to bring themselves to mention that this means $10 trillion in cuts over ten years.

None of the plans currently being discussed in Washington achieve deficit cuts of that magnitude….

No kidding. Still, it just goes to show how we have been lied to at every turn about what the credit rating agencies’ concerns are here..

We don’t have a ‘raise the debt ceiling or default’ problem. We have a ‘government spending a trillion dollars a year more than it should’ problem. And raising its line of credit is only going to make that problem worse.

This article was posted by Steve on Friday, July 29th, 2011. Comments are currently closed.

One Response to “S&P: US Needs $10T Cuts For Debt/GDP Ratio”

  1. proreason says:

    The rating agencies are irrelevant when it comes to government debt.

    What counts is whether people buy US bonds or not, and the Treasury sales article answers that question. The same might be said about corporate debt, except that there are literally about 10,000 corporations in the world and that it is impossible for an individual to have any chance to understand the financial situation of more than a handful, and even then, corporations are so good at financial tricks that it is impossible to know for sure…..ergo, Enron, WorldCom, etc etc etc. But for countries, despite the US’s difficulties, it is abundently clear to even a casual observor that the US is far more stable than any but a handful of other countries, and they aren’t anywhere near the scale of the US. If you had to park a few trillion somewhere, buying Swiss bonds isn’t going to help much. And would you buy China’s bonds rather than US bonds, knowing that China could snap it’s fingers and default whenever it wants? Of course not. Any rational person would invest in US bonds.

    Unfortunately, the fact that US bonds are still the most attractive in the world means that more debt is going to be easy to acquire.

    So, as often happens, good news contains a seed that is many times worse on the downside than the good news is on the upside.


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