Thursday, July 28, 2011

It's Downgrade Time

The US is on course for a ratings agency downgrade from AAA to AA. This has nothing whatever to do with the debt limit extension debate. The only mild relevance to the debt limit debate is the missed opportunity to use the debt ceiling discussion to begin to take steps to reign in the entitlements.

But, alas, no one was interested in reigning in the entitlements. So, the downgrade is now inevitable. Look for the downgrade to take place in a friendlier environment. It won't happen this week or next. But, it will certainly take place before year end.

The problem is that no one in Congress votes on entitlement spending. Entitlement spending is part of the "mandated" budget items. The spending on entitlements has no limit other than population growth I suppose. There are no funds available in the future to fund the entitlements, so selling treasury bonds is the only way to fund the entitlements until no one will buy our bonds anymore. That day is probably coming within the next five years.

Cutting discretionary spending (or cutting nothing, as in the Reid bill) doesn't really matter in the long run. It is not Iraq, Afghanistan, Bush Tax Cuts, the Stimulus, or anything else. It is entitlement spending. That's it, nothing more. Eliminating spending on all other items does not matter in the least. Raising taxes simply takes a sledgehammer to the economy and commits the US to generations of economic stagnation. Only cuts in entitlement spending matter and no such cuts were ever considered in the recent debate. (It is true the Obama folks claim that they were willing to consider entitlement cuts, but they never really mentioned anything specific and simply saying you are for it is the not the same as putting forth specifics).

We are seven are eight years away from the numbers that apply to Greece today. That's where we are. In eight years, any plan to avoid defaulting on our debt will involve cutting payments to social security recipients and medicare recipients who are already retired. If you want to avoid doing this kind of draconian cuts in the future to recipients, you must move the age of eligibility of these programs out right now. Move social security and medicare eligibility to age 70. Anything short of that won't work and will involve cutting payments to oldfolks when they no longer have choices and are no longer working. That's where we are headed.