Sunday, December 19, 2010

Is the USA Triple A going away?

Will maintaining the Bush tax cuts jeopardize the AAA credit rating of the United States?

Here we have the classic scenario of being between a rock and a hard place. On the one hand we have the tenuous condition of the U.S. economy while on the other the ability of the U.S. government to continue to fund the ever expanding budget deficits.

While raising taxes would be devastating to the US economy, maintaining the Bush tax cuts could add close to $1 trillion dollars to the deficit. A lower bond rating, or even the perception that a lower rating is on the horizon, would increase the rate demanded by buyers and would in and of itself create a problem for the federal government to service just the interest due on our bonds.

The loss of our AAA rating was, until recently, an unthinkable event. Not any more! Said Moody's prior to passage of the compromise bill, "From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth. Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years."

Rock and a hard place!

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