We're Out Of Money; Says Barack Obama
James Bibbings, May 28th, 2009
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James Bibbings - Commodity News Center
Last week, Standard and Poor's released a statement suggesting that the United Kingdom's sovereign credit rating was being reviewed. The statement was made on expectations that the UK's debt would approach or even exceed 100% of its annual GDP during 2009. Scary. Traders the world over saw this as a sign to evaluate the credit ratings of other sovereign nations and the US was hit hard. US equities markets began to plummet and the dollar was beat to the ground. US Bond yields almost instantaneously jumped 30 basis points driving prices to the floor and sparking discussions of an impending debt downgrade. So is there any merit to the fear of a US debt downgrade? Or worse yet...gulp...even fears of a default?
"We're Out Of Money" said Barack Obama (go to second 0:29) on CSPAN last week and indeed "we" are. The President goes on to say (paraphrased) that we have a "short term problem" and a "long term problem". He suggests that our fiscal issues and the current economic crisis are short term issues while the looming crisis is Medicaid and Medicare. However, facts from Mr. Obama's administration tell a different story.
According to the United States Congressional Budget Office, if Barack Obama would have changed nothing after coming into office, by 2019, the US debt obligation would have amounted to 42% of annual GDP. How much is 42% of annual GDP? Roughly 5,991.13 Billion dollars, this (shockingly) is in-line with historic norms. However, the CBO goes on to say that after the past 6 months of spending, and the inclusion of Barack Obama's proposed budget, by 2019 the US will need roughly 82% of GDP to service its debt load.
Does this sound like it is a short term problem to you? Not that the US's health care issues are not problems, but this level of debt is more than just a short term thing. The amount that the US has borrowed from the world is simply staggering and is well beyond normal. This level of debt will take decades to pay back and will cost multiple generations a tremendous amount. So to the first question, is a US debt downgrade possible? Absolutely. In that case, if a downgrade is possible, what does it mean for America's outstanding obligations?
