Friday, January 11, 2008

Boomsday approaches; U.S. credit rating in jeopardy; Federal health care spending; Social Security;

The United States runs the risk of losing its AAA credit rating within a decade [for the first time since the rating was created almost a century ago]. Moody's warned that this scenario could occur "unless it [the U.S.] takes radical action to curb soaring healthcare and social security spending."

If the U.S. loses its credit rating, it will be harder for the federal government to borrow money. The federal government's borrowing costs will soar. Interest payments on the national debt will soar. Budget deficits and the federal debt will continue to grow.

Just as importantly, "safe" investments such as bonds, T-bills and money market mutual funds will be jeopardized, as the stability of such investments has always been predicated on the credit rating of the U.S. government and its ability to repay its debt. [The previous sentence is a gross understatement.]

With these previously "safe" investments now at risk, the devastating consequences will spill into other markets, such as insurance and banking (including mortgage lending). The consequences for mortgage lending have been forecast in such books as Empire of Debt (specifically the final chapters). The coming credit crunch is related to and will compound the bursting of the existing real estate bubble.

Since the Moody's warning focused on healthcare and SS spending as the principal culprits of the coming credit rating downgrade, I wonder how the candidates will react to this news.

In the pre- new media days, this story would have been buried, lest it prevent the candidates' attempts to bribe the voters with their own money. If this story sees the light of day now, most candidates will simply spin it into their own pre-existing demagoguery. They will say that the coming crisis shows the need to enact their own programs to greatly expand federal health care spending, even though such spending is the cause of the coming crisis.
Most presidential candidates have vowed to reform the healthcare system but many of them, especially on the Democratic side, have focused on extending coverage to the 40m-plus uninsured Americans rather than on cutting costs.
H/T Financial Times

For any problem, politicians confuse the cause with the solution.

Some day, when you are forced to accept pennies on the dollar for your money markets and other "cash" savings, remember to blame every politician that pushed for more government health care and refused to face facts on Social Security.

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