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Moody’s Credit Rating and Government Spending

September 17, 2012 J

By Jason Hughey

If you were already worried about what the fiscal cliff could do to the economy, Moody’s announcement this past week probably didn’t make you feel much better.  In case you aren’t aware, Moody’s Investors Service said that unless the United States Congress gets its fiscal act together, the U.S. government would likely face another potential downgrade on its debt sometime next year.  This comes a year after Standard & Poor’s downgraded the United States’ credit-rating from AAA to AA+.

How should we understand Moody’s warning?  Many people were outraged and shocked when Standard & Poor’s downgraded the United States last year and many people will be upset if Moody’s does the same thing.  However, is the threat of the downgrade a real problem in and of itself?  For that matter, is the actual downgrade, if it occurs, a problem in and of itself?

The answer to both of these questions is “no.”  Ultimately, we are reminding ourselves of Standard & Poor’s downgrade and pondering the likelihood of a downgrade from Moody’s because our economy is not healthy.  Since the 2008 recession, any “recovery” that we have seen has been due to artificially propped up “stimulus” efforts and cheap credit that have misdirected resources and encouraged malinvestments.  Thus, not only is the recovery floundering, most of it isn’t even real economic recovery.

Meanwhile, the U.S. government has continued its opiate-like addiction to higher spending as if it can serve as a cure-all panacea to the economy’s woes.  In reality, such high levels of unaffordable spending have yielded a massive debt crisis that now has the United States on the brink of another potential rating downgrade.  No one party or president is at fault for this spending crisis.  Since 1980, regardless of which political party controlled the Congress or the presidency, the United States has consistently increased its debt limit.  Usually, the pace of debt accumulation is faster when the House, Senate, and presidency are all controlled by the same party regardless of whether that party is symbolized by a donkey or an elephant.

Of course, the solution to the debt problem is to recognize that unsustainable spending levels cannot be continued.  Congress should reduce federal outlays without raising taxes.  A balanced budget is important, but it cannot be attained without making a hard commitment to real and significant spending cuts, which are the real driver of our fiscal insolvency.

As the economist Ludwig von Mises once wrote, “What the doctrine of balancing budgets over a period of many years really means is this: As long as our own party is in office, we will enhance our popularity by reckless spending.”  As the United States continues to barrel in the direction of the fiscal cliff, it’s essential to remember that politicizing the issue of how to fix the economy will more likely obfuscate things rather than help people understand one of the real causes of our current woes: outrageous and irresponsible government spending.  The fiscal cliff, the debt crisis, and Moody’s threat of a downgrade serve as a reminder of the kind of disastrous things that a centralized, big spending government can do when it refuses to curb its reckless spending.

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