Warning Shot on the Deficit

Congress and the administration got a warning shot on the deficit this week from a major credit rating agency, which downgraded its long-term outlook on U.S. debt from stable to negative. The statement from Standard & Poor's sent stock prices tumbling and gold prices upward. That's a stern message that bickering has to come to an end and real action must be taken to curb the deficit and total U.S. debt.

Stock prices have since recovered somewhat, but gold prices are still strong. The rating agency affirmed its AAA or top rating for the debt for now, but added that it worries about the country's "very large budget deficits and rising government indebtedness," contending that the "path to addressing these is not clear to us."

S&P added that it believes "there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013."

In other words, the rating agency worries that electioneering for the 2012 presidential and congressional races will get in the way of serious discussions and real action on trimming the federal deficit and overall government debt as a share of economic output.

S&P's main competitor in the debt rating business, Moody's, did not join it in changing its long-term outlook, noting that the debt reduction plans produced by President Barack Obama and Republican House Budget Committee Chairman Paul Ryan of Wisconsin "represent a significant shift in the U.S.

fiscal debate." However, Moody's pointedly noted at the end of its statement that the United States "stands out from other major countries as not yet having a plan for reversing its upward debt trajectory."

This is all gentlemanly market-speak for telling Congress and the president to get their acts together on deficit-cutting. As Reuters news service noted, the government takes in less than 60 cents in revenue for every dollar it spends. The ratings agencies aren't alone in voicing concerns. The largest bond fund, PIMCO, Reuters noted, announced in February it was dumping all of its treasury holdings from the $236 billion Total Return Fund.

Obama and Treasury Secretary Timothy Geithner have both issued soothing assurances that the debt problem will be addressed, but the 2011 budget deal with congressional Republicans announced with such fanfare last week isn't encouraging. Total savings of $38 billion were touted, but the Congressional Budget Office subsequently noted that the actual spending cuts in the current fiscal year would amount to only $352 million.

With a total of more than $14 trillion in total outstanding debt, both Democrats and Republicans will have to do better than that.

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