On Tuesday, Moody’s Investors Service threatened to cut the US credit rating if Congress fails to come up with a debt deal before the fiscal cliff is reached at the end of the year. The agency already has a negative outlook on US debt. Last year, Standard and Poor’s cut the US credit rating from a perfect AAA to AA. Despite the credit rating cut, bonds are still selling at a breakneck pace.
Doom was predicted prior to the first rating cut, but the effects have been minimal. After the financial crisis, the credit rating agencies have lost most of their credibility. The agencies gave AAA scores to multiple toxic securities and companies. S&P cut the US credit rating despite the fact that the US has never missed a debt payment. The rating cut was not warranted.
The latest statements from Moody’s follows the trend of illogical behavior from the credit rating agencies. The fiscal cliff would no doubt be bad for the US economy, but it would decrease the deficit in theory. The fiscal cliff consists of a series of spending cuts agreed to in the Budget Control Act and the expiration of the Bush tax cuts. These austerity measures would trim the deficit to around $600 billion next year, as opposed to over $1 trillion.
If Europe is any example, the budget relief would be short lived if a recession took hold. Recession’s drain the government of revenue due to fewer people paying taxes. They also force more people to depend on the safety net. The austerity measures forced on European countries did little to help their debt problems as they forced many nations into recession.
Nothing will be done with the debt problem until after the election. Depending on how the election goes, Republicans may be more willing to work with Democrats to avoid taxes going up on all Americans. The defense cuts are also likely to be looked at. Once again the best we can hope for is an 11th hour deal.