Monday, April 18, 2011

S&P Lowers Outlook on US Government Debt

In a strong wake up signal to our elected officials, S&P lowered its outlook on the US's long-term credit rating from stable to negative (though retained its AAA rating). As demonstrated in the chart below, outside of the Japan with a gross debt/GDP ratio of 220%, the US leads all developed nations with a ratio of 92%.

Given that the US deficit should exceed $1.5 trillion this fiscal year, its laughable that both sides of Congress declared victory when agreeing to spending cuts of a paltry $38.5 million last week. While spending in Washington remains unrestrained, the discipline of the bond market will most certainly force action should Congress not get more serious about reducing our deficits.

S&P's announcement should serve as a shot across the bow for government officials who think that "deficits don't matter," particularly with the planned expiration of the Fed's QE2 program in June.