Shot Across the Bow

For quite awhile now we’ve been writing about our concerns over our country’s budget deficit and growing mountain of debt.  Now that a prominent rating agency has fired a warning shot across the bow, we are hopeful that lawmakers will put aside political differences and start to take this situation seriously. 

On Monday morning, Standard & Poor’s delivered a strong warning shot to U.S. lawmakers urging them to get a handle on the finances of our country or risk losing our nation’s AAA credit rating.  The rating agency says the U.S. faces a one in three chance of a downgrade in the next two years.  This would likely happen if the White House and Congress could not come together to create a credible plan for reducing our budget deficit and resultant debt, all as a percentage of our overall $14 Trillion economy.

We are at a critical juncture in our nation’s history.  The credit worthiness of our country is the underpinning on which all other asset classes are valued.  A lower credit rating could restrict access to capital markets, and it would drive up borrowing costs across all fixed income investments.  If the credit quality of U.S. Treasury securities is not as high as investors once perceived, then we would expect to see an erosion of confidence and repercussions that would be felt throughout the financial markets. 

We think the American public must become more informed and demanding on this issue.  Entitlement promises to baby boomers are much more costly than anyone ever thought would be the case.  For example, the unfunded liability for Medicaid, Medicare and Social Security is $66 Trillion, a number that dwarfs our present federal debt of $9 Trillion.  As a country, we either have to change our promises on these future benefits or watch our nation’s credit rating decline.  It is that simple and that difficult!