It no longer matters whether there is political will to act as is required

09:36 15Jul11 RTRS-S&P PLACES U.S. ‘AAA/A-1+’ RTGS ON CREDITWATCH NEGATIVE
09:37 15Jul11 RTRS-RPT-S&P PLACES U.S. RATINGS ON CREDIT WATCH NEGATIVE
09:38 15Jul11 RTRS-S&P SAYS AT LEAST A 1 IN 2 CHANCE IT COULD CUT RATING
09:38 15Jul11 RTRS-S&P SAYS POLITICAL DEBATE ON DEBT CEILING A SIGNIFICANT UNCERTAINTY
09:39 15Jul11 RTRS-S&P SAYS SEES INCREASING RISK OF POLICY STALEMATE
09:39 15Jul11 RTRS-S&P SAYS COULD LOWER U.S. RATINGS WITHIN 3 MONTHS
09:39 15Jul11 RTRS-S&P SAYS MIGHT CUT RATINGS BY 1 OR MORE NOTCHES IN AA RANGE
09:39 15Jul11 RTRS-S&P SAYS BELIEVES RISK OF PAYMENT DEFAULT SMALL BUT INCREASING

The danger is right there in the bold.

This is not about the “ceiling.”  It is about fiscal sustainability.

Here is the text of the salient section from S&P as reported by Reuters:

— We may lower the long-term rating on the U.S. by one or more notches into the ‘AA’ category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.

There it is.

Folks, it is time to cut the crap.  We must cut the growth of government debt to below the growth in GDP.  Since at present the government is providing ~12% of GDP via borrowing, this means we must cut federal spending by something closer to 15% of GDP, since GDP will contract when we do this (it’s the math, and is inescapable) and debt must shrink faster than GDP does, or grow slower than it does.

Incidentally, that means we must cut federal spending approximately in half, double tax receipts (not rates), or some combination of the two that adds to the same figures.

And we must do it now, because the laws of exponents, which we cannot change, state that the longer we take to get to the above point the greater the cut in the federal budget will have to be.

In other words we will soon get to the point where it makes absolutely no difference what we do – default will become mathematically inevitable.

This sucks, and I understand it sucks.  It doesn’t matter if it sucks.  It also doesn’t matter if Congress likes this or not.

In blunt language it no longer matters whether there is political will to act as is required.  Arithmetic does not care if you like the answer that it provides.

I have been warning of this outcome for four years, and saying that time, while available, is not unlimited.

We are now out of time.

H/t Ozzie

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