Saturday, August 6, 2011

About bloody time...

The S&P rating agency downgraded the U.S. government debt (but not by much). My thoughts are:

1) Why did it take so long?

2) Given that we are already over the 90% Debt to GDP ratio threshold discussed with Reinhart and Romer in This Time is Different, implying less economic growth because of the drag of terrible fiscal policy on the economy, perhaps the rating downgrade should have been more than one rung down.

3) Given that you could see Debt to GDP rapidly increasing from 2002 to 2010 (from 58.5% to 89.9% - it's over 90% now given that we now have over $14.3 trillion in debt, and GDP was estimated to be $14.7 trillion by end of 2010), such that the ratio's growth rate was 5.5% annualized from 2002 to 2010 versus only 1.8% annualized from 1980 to 2002, it's really a shock why we did not get downgraded sooner.

Those rates seem small, but we're talking about compounding here. A 5.5% annualized rate for debt growth is not sound. Hell, with all the borrowing we've done, we should be aiming for a negative debt growth rate. Neither Congress nor the President really got that memo. Hence, the downgrade.

Much good as it will really do. Maybe it will be a wakeup call. But judging from what I saw on CNN this morning, with an administration official dismissing the downgrade, it will not be.

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