Perhaps it was missed over the weekend that Egan-Jones was the first to downgrade the credit of the United States of America from AAA to AA+. This downgrade was not based upon the latest “significant crisis”, but rather our long-term performance.

The major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending. We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100%….

History has proven that defaults on domestic public debt do occur. In fact, seventy out of three
hundred twenty defaults since 1800 have been on domestic public debt

Think of our debt as charged to a credit card with a variable rate. If Moody’s and the other credit ratings agencies follow Egan-Jones’ lead, our variable rate just went up. Considering that servicing our debt ($213B) is currently about 6% of the federal spending ($3.6T) and 10% of total revenue ($2.2T), imagine the compounding effect of this cost, especially as we continue to add to the $14.6 trillion debt exponentially. For perspective, over the past two years, the debt has increased from about $8T to $14.6T. The annual budgets alone are scheduled to add over $1 trillion per year, less the average of $0.24 trillion per year to be removed with the new bill passed yesterday.

Debt will increase while interest rates simultaneously increase which could very well put us in a situation as illustrated by the chart at the left (click to enlarge the chart). This could become a hole that is impossible to dig out of.

Again, the reason our credit rating has dropped:

The major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending. We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100%….

The debt ceiling debate was nothing but a distraction. The debt “ceiling” has never stopped the US from spending more, as we discussed previously. The real issues are “the difficulty in significantly cutting spending” and addressing the cumulative debt.

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