Yesterday, Standard & Poor’s changed its outlook for U.S. government debt to “negative,” pummeling the financial markets. According to The Wall Street Journal, “S&P currently rates 19 out of 127 sovereigns AAA. . .the U.S. is the only one among the 19 that has a negative outlook.”
In finance, U.S. government bonds of various maturities represent the “risk free” rate of interest. This is because it’s assumed U.S. government bonds are “risk free,” i.e. there is no chance of default. With the massive level of U.S. debt, and attempts to slash governments budgets falling short of being able to substantially cut U.S. debt, are we now to assume there is no such thing as a “risk free” rate?
I’ll let the finance professors ponder this question, however, I won’t make any assumptions. When I was a student I learned that you don’t increase taxes or decrease government expenditures during a recession, or times of slow economic growth. However, the U.S. must plan to do so after our economy is back on track, as our current path is not sustainable. Since U.S. government debt remains rated AAA (only the outlook has turned negative), now represents the opportunity for elected officials to move forward by slashing future government expenditures, increasing taxes, and saving America from itself.