Moody’s: A Debt Fueled Economic Collapse Could Be Closer Than You Think. Much Closer.

by John Hawkins | June 3, 2011 6:06 am

If America loses its AAA rating, the cost to finance the debt will explode. It would represent a running leap into a debt spiral that the U.S. might have trouble pulling out of short of bankruptcy.

Moody’s is now warning that the debt limit fight could lead to exactly that sort of disastrous leap. The Democratic spin is, “See?!? This means the Republicans are wrong! We just need to hurry up and raise the debt limit and not worry about making any real cuts!”

Au contraire mon frere, that’s not what Moody’s is saying at all. Let me quote directly the first three paragraphs of Moody’s post on the subject[1] (Emphasis mine — and it’s worth noting that every liberal blog I’ve read so far has simply left these inconvenient parts out.)

New York, June 02, 2011 — Moody’s Investors Service said today that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the US government’s rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody’s to change its outlook to negative on the Aaa rating.

Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations. The heightened polarization over the debt limit has increased the odds of a short-lived default. If this situation remains unchanged in coming weeks, Moody’s will place the rating under review.

Moody’s had previously indicated that its stable outlook on the Aaa rating was based on the assumption that meaningful progress would be made within the next eighteen months in adopting measures to reverse the country’s upward debt trajectory. The debt limit negotiations represent a real near-term opportunity for agreement on a plan for fiscal consolidation. If this current opportunity passes, Moody’s believes that the likelihood of anything significant being accomplished before the next presidential election is reduced, in part because the two parties each hopes to capture both a congressional majority and the presidency in the 2012 election, after which the winning party could achieve its own agenda. Therefore, failure to reach an agreement as part of the current negotiations would increase the likelihood of a negative outlook in the near term, because the upward debt trajectory would still be in place. At present, this appears the most likely outcome, in Moody’s opinion.

In other words, Moody’s doesn’t want the U.S. to default, but it’s also essential that we put a plan in place to help get the debt under control if we don’t want to risk our AAA rating. Of course, that’s exactly the Republican position as opposed to the Obama administration’s position, which is essentially increase the debt limit without cutting any spending at all.

In other words, the GOP is trying to save the country’s AAA rating while the Democrats are fighting tooth and nail to bankrupt the country. That may sound scandalous, unfair, unbelievable — except it’s exactly what’s going on. There would be no spending cuts at all if the GOP weren’t insisting on it and every dime of cuts we get will be because the GOP FORCED the Democrats to capitulate. That’s the utterly bizarre, Twilight Zone scenario we’re dealing with today. The GOP is trying to stave off bankruptcy for the country while the Democrats are attacking them for it and trying to steer the economy into the side of a cliff at the same time. If Hollywood had put this in a movie twenty years ago, no one would have believed it.

  1. quote directly the first three paragraphs of Moody’s post on the subject:

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