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  • What Moody's Really Told Boehner and Obama about the Debt Ceiling

    Everyone’s heard that Moody’s has threatened to downgrade our bond rating unless the debt ceiling is raised. We get that—crisis pending, yada, yada, yada. But if you read the announcement closely, there are important new points they added to the mix.

    First, Moody’s really doesn’t believe–that the President really will let Geithner default on our Treasury bonds—despite all of President Obama’s foot-stamping, scaremongering, and high stakes “This may bring my Presidency down” retro-drama.

    Moody’s says that “there is a small but rising risk of a short-lived default” (emphasis added), that “the probability of a default on interest payments is low,” and that principal and interest “have always been paid on time,” even though some past debt limit debates have “been contentious.”

    This tells us that they have confidence that in the end that the federal government will not default on the debt, though there may be some tense moments over the next few weeks or so.

    But the second issue is where it gets interesting. And here is where House Speaker John Boehner (R–OH) and Obama need to pay attention.

    The real future of our bond rating depends less, in their view, on the timing of a debt limit resolution—which they believe is inevitable—than on the substance:

    The outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction. To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.

    This means Congress and the President must bring down the deficits and debt, which must then begin to stabilize. And the key part is that any legislation must start those steps right now.

    So Boehner and Obama must deliver major, substantive, transformational changes in the budget that are real—no gimmicks, gents—that begin to take effect immediately and sustain and grow automatically over the long term—no back-loaded cuts that can be easily waived at the next opportunity.

    Moody’s will be doing its debt downgrade tango if debt ceiling legislation doesn’t deliver a plan that fundamentally reshapes the nation’s finances to put an end to our Greek debt formula.

    Just how big do the changes need to be to produce a “decline in the ratios of debt to GDP and debt to revenue”?

    Consider Obama’s published budget (not the fake, speechified proposal), which would add $10 trillion to the debt. Any legislation leading to a decline in the debt-to-GDP ratio would have to make a major dent in the debt increase.

    One option that is rapidly gaining traction in the Senate is the bizarre McConnell proposal, which would result in nebulous proposals for around $2.5 trillion in cuts, which Congress can easily ignore after Obama (not Congress) raises the debt ceiling. Hmmmm, immediate cuts? Nope. Definitely cuts spending? Nope. Smoke and mirrors? Yep. So that doesn’t pass the Moody’s test. But let’s set these flaws aside for now.

    McConnell’s maximum possible cut would result in only a 25 percent reduction in Obama’s scheduled $10 trillion increase. Debt would still grow by $7.5 trillion, an increase in excess of 50 percent (over 10 years). And it’s a big “if” that those cuts would ever materialize. So, hardly scoreable, certainly not enforceable, and impossible to judge how the cuts would play out beyond the 10-year budget window because there are no cuts to score! And no deal to enforce!

    For $2.5 trillion in savings to work against the Moody’s debt downgrade tango, savings must be scoreable by the Congressional Budget Office—or spending caps must be enacted that have explicit enforcement mechanisms and will lead to further budget savings as reforms take hold and become robust. Bye-bye, gimmicks. If Moody’s had been doing the debt downgrade tango during Obamacare, those phony budgetary gimmicks would have dropped our credit rating faster than a porcine partner on the dance floor.

    No, the kind of changes necessary that would stabilize the debt can be found in “Saving the American Dream: The Heritage Plan to Fix the Debt, Cut Spending and Restore Prosperity.” Our plan balances the budget in a decade and keeps it balanced thereafter—without raising taxes. By 2035, debt held by the public is at 30 percent of GDP and falling.

    Obama, on the other hand, wants to raise taxes to solve all or part of the debt crisis. But without fundamentally altering the spending trajectory (the one he would willfully worsen), either taxes would have to rise constantly or else our debt would continue to mount.

    And for the debt to stabilize, the economy needs strong growth in addition to spending cuts. Just how that would happen under Obama’s tax hike solution—especially when it is languishing with 9.2 percent unemployment today—is never explained. It’s very hard to see how tax hikes would truly meet the test of the debt downgrade tango.

    So, in the final analysis, what Moody’s is really telling Boehner and Obama, through its broadcast to the world, is that there must be transformational changes in spending that will put this nation on the right course and keep it there. And those changes must happen now.

    So, Mr. President and Mr. Speaker: Let’s get this thing done.

    Posted in Economics [slideshow_deploy]

    21 Responses to What Moody's Really Told Boehner and Obama about the Debt Ceiling

    1. Thank you so much for this informative article. It has helped me to get "my head around" all this debt ceiling nonsense! Bravo!

    2. poorrichardstv says:

      What about the constitutionality of McConnell's plan. It seems to be in direct violation of Article I, Section 8 which gives the Congress (and only the Congress) the power to issue debt: http://poorrichardsnews.com/post/7658556488/is-mi

    3. 475Linebaugh says:

      I know John Stossel gave Heritage some kind of trophy for its plan to fix the budget and debt, but I still liked Mr. Stossel's plan much better!

    4. L.A. Davis says:

      So, essentially the Republicans are absolutely right…..If the debt ceiling is raised, it must be contingent on long term reductions with a deficity trajectory that leds to the decline in the ratiuos of debt to GDP….immediately.

      Most find it difficult to follow this horrific place we find outselves at, but reducing your debt in accordance with the money you bring in is not rocket science.

      One has to wonder exactly what Obama's movtivations really are when you look at the numbers and look around and see the country that is nown being told 'live with it'.

      The answer is "No we won't," The "Change" promised is not acceptable.

      • D Kirby says:

        AMAZING ! Yours is the viery FIRST ( & only a far as I've read) to ask EXACTLY the RIGHT question –
        THAT – IF ANSWERED (CORRECTLY) may well begin to set our country on the right course .
        EXACTLY what are Obama's motivations ? Our Ship is going to sink long before we reach LAND due the current OVER LOAD . . . our country is currently on OVER LOAD (as to expenditures) . . . and Obama is on a direct course to sink the ships of all 50 States. The question I keep asking over & over < ~ > Is there any way on God's Green Earth to prevent these "Powers That Be" from destroying our Country along with the Amazingly Wonderful People who work so hard to "STAY THE COURSE>"

    5. Richard says:

      This should be read and understood by all Americans Democrats, Republicans, EVERYONE!!__To President Obama and all 535 voting members of the Legislature, It is now official that the majority of you are corrupt:. You have FAILED in every "government service" you have shoved down our throats while overspending our tax dollars.
      And you took over the Mustang Ranch in Nevada because they didn't pay their taxes, and now it is closed. You could not even run a house of prostitution.

      • allen says:

        Right on Brother, the majority of the 535 are Attorneys, But you hit a Home Run, Thanks.

      • Bobbie says:

        totally Richard!
        I'd like to add everything outside their oath of office is NOTHING BUT CORRUPTION…sorry!

    6. Richard says:

      Someone please tell me what's wrong with all the people that run this country!!!!!!
      We're "broke" & can't help our own Seniors, Veterans, Orphans, Homeless etc.,???????????
      In the last 24 to 30 MONTHS we have provided aid to Haiti , Chile ,Turkey and Japan .. And now Pakistan ……home of bin Laden. Literally, BILLIONS of DOLLARS!!!
      Our retired seniors living on a 'fixed income' receive no aid nor do they get any breaks while our government pours Hundreds of Billions of $$$$$$'s and Tons of Food to Foreign Countries!

    7. Good piece by Ms. Fraser, would like to disagree on one assumption though… That is, that higher taxes would cover the cost of additional spending. There's significant evidence to suggest that we're at (or near) the peak of the "Laffer Curve" in tax rates. That means that moving rates in either direction is likely to cause a decrease in revenue.

      Her main point is still valid though, that is – Moody's warning was to return to fiscal responsibility, not just raise the debt limit.

    8. allen says:

      I just WODER if the majority of Congress are Attorneys????????. Because this Mess sure sounds like something they are excellent at Screwing UP. I would bet it is the cause and not the Parties. I also believe all the excellent attorneys have passed on and we are left with a group of DUDS, Oh you might find one here and there.

    9. MrShorty says:

      I grow weary listening to all the budget discussions talking about the impact over 10 years. They need to focus on 1,3 and 5 year plans. If each of those plans shows an improvement in fiscal control, the 10 year plan will take care of itself. If one evaluates prior 10 year plans they will quickly discover that the fiscal projections were quite understated. Usually to the tune of 50-100% more expensive than projected.

      If Congress and the President could come up with a fiscal plan that shows near term reductions in the debt, I believe the business community and the average American consumer would begin to regain confidence in the economic future of the Country and real growth will occur.

      • Darryle Owens says:

        Agreed. Short-term plans with significant deficit and debt reduction impact will give people and markets confidence now — when we need it. Speaking in ten-year increments is really meaningless unless the near-term impact is shown as well. And even the near-term rhetoric doesn't mean anything unless it's codified by law or Constitutional amendment.

    10. Dwana Townsend says:

      President Obama talks a good talk. Show us the CUTS you are proposing!!! Let's see YOUR plan! Why doesn't he take a look at the entire Federal Budget (line by line) and identify wasteful and duplications of spending. This is not rocket science, it's simple math Mr. President.

      The Gall of you to threaten to withhold our Senior Citizens Social Security, Medicare and Veterans Pay!!! Just as you held our Military families hostage during the last budget debate. "BIG MISTAKE"

      NOW is the time to put forth a REAL plan that can actually be scored!!

    11. Bob McNeely says:

      With both of us 90 years of age, in retirement after working and saving for more than a half century, my wife and I deeply appreciate the impartial wisdom of the Heritage Foundation. You are a bright light in a dark tunnel created by our news media and so many of our citizens in and out of Congress. We thank you.

    12. ROYSTOLL2 says:

      This is getting so bad, I am thinking of giving up everything and running for Congress myself. What is it with these people? Do they just lack common sense or are they speaking another language in Congress? We have got to cut the spending and do it now. We overspend on every single thing the government touches and this has got to end. Collective bargaining has no place in government in hiring as there is a massive conflict of interest that will cause taxes to go up daily. Charity begins at home and it is incumbent on all of us to take care of our seniors. It is a crime to hold the unemployed hostage because their jobs don't coincide with the green agenda of the environmental nazi's that are currently in charge of our government. I am not a lawyer, but I guarantee you, I know right from wrong. It seems like a lot of people in government do not!

    13. John says:

      The real problem behind this whole mess is ideology. Obama truly does want to spread the wealth. He does not look at what you have worked for as yours. He believes with a religious zeal that the government is the source of all good so therefore it should be in control of everything. He believes that if you have money in the bank that you are selfish not to give it to the government so that it can be given to someone unwilling to work as hard as you did to earn it. His belief system also shows his lack of intelligence. The Soviet Union tried this road of government control of establishing a utopia by having just about all rewards given to a benevolent state bureaucracy and the Soviet Union collapsed. Cuba tried the same road and they are in poverty and misery. China tried the same road and has found that capitalism works a whole lot better and is slowly transforming to a country where the government is still very repressive but the business community is allowed much more freedom because a free business community produces wealth. Anybody with any brains can see that continued deficit spending destroys both individuals and countries. Obama could guarantee himself a second term by stepping up and being a true leader and reducing spending to where it is not greater than revenues. The problem is that this would require him to throw away the beliefs that his whole identity is built around. He would have to say to the welfare class that they are responsible for taking care of themselves and aren't victims. He simply can't do this because it is against everything he has stood for in his whole life. This is an ideological battle which the conservatives need to stand firm on and win or else our entire country had better get used to poverty.

      • Daddysgirl says:

        The thing is that this mess would not have happened if Bush had not started the wars. That alone takes a LOT out of the coffers of the American people. The wars are NOT fought for freedom but to maintain the status quo for Haliburton and other corporations. This is not a govt. ran by the people but by the major corporations. They have the money to put propoganda into the media so that nincompoops will vote against their own intrests – how someone who shops at Walmart feels that he has something in common with Bush/the Republicans is beyond me!

        Either way, it looks as though they are hell-bent on driving this car into the wall at 90mph. Need to jump out of the car. Those who voted republican (1st Bush/ 2nd Bush) need to brace for impact.

    14. S Rubicon says:

      Wow! Now THAT actually made sense! And that is somewhat unusual in these times.

      Now! How do we get congress & the president, along with his minions throughout the federal government bureaucracy, to actually listen and do this, for the sake of the nation?

      Personally I doubt it can happen. This president is so commited to spending as though his decisions alone will solve all the problems of the downtrodden, that his Marxist views could not accept a logical decision to save the day!

    15. Pingback: McConnell-Reid Plan Fails to Cut Spending, Degrades U.S. Creditworthiness

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