On Tuesday, Fitch Ratings, one of the nation's three big rating companies, put the U.S. government's AAA credit rating on watch for a 'potential downgrade'. The announcement would affect all outstanding U.S. sovereign debt securities, long-term foreign and local currency debt. Late last night the U.S. House scrapped plans to vote on a Republican proposal once they realized they would not have the votes to pass the measure.
"Although the Treasury would still have limited capacity to make payments after [Thursday], it would be exposed to volatile revenue and expenditure flows," Fitch said. "The Treasury may be unable to prioritize debt service, and it is unclear whether it even has the legal authority to do so."
This is a result of Congress and the Obama administration not raising the federal debt ceiling before the U.S. Treasury exhausting extraordinary measures, as stated by Treasury Secretary Jack Lew. After October 17, 2013, Lew has said the Treasury would only have $30 billion of cash reserves and by law will not be able to borrow more. The only way to pay the obligations of the United States would have to come from current income streams which runs 30% less than what is needed. The Treasury owes $12 billion in benefits to Social Security recipients on Oct. 23, 2013. Eight days later, it owes $6 billion in interest on government bonds. And Nov. 1, 2013, the government owes $67 billion in another batch of Social Security checks, according to the Congressional Budget Office. The U.S. government continues to take in over $2.5 trillion of annual income even under the government shutdown.
According to the Associated Press, 60 percent of adults prefer a smaller government with fewer services while 35 percent prefer a larger government with more services. According to a NBC/Wall Street Journal poll, 52 percent of adults say the government should be doing more to help people solve their problems; 44 percent think the federal government is doing too much. Rasmussen did a poll earlier this year and found 64% of Americans think too many people are dependent on government.
Geoffrey Neale, chair of the Libertarian Party said, ""The Libertarian Party calls for a permanent government slowdown. Cutting taxes, removing regulations, ending failed Big Government programs, and cutting total government spending is the only way to revive the American economy and save it from further decline. Americans should be very afraid every time politicians pass another 'continuing resolution. It's their latest method for keeping government spending high, adding to government debt, devaluing the dollar and putting the American economy at risk."
This morning on CNBC, billionaire investor and President Obama confidant, Warren Buffett said, "I would give this advice to the Republicans, because they dug the hole, and I'm not saying the Democrats haven't done the same in the past or anything, but this particular hole belongs to the Republicans. I think if they were wise, they do not want to be remembered as the party that destroyed a reputation the nation has built up over two centuries. They made a mistake. They can fight out the budget, they can fight out ObamaCare, they can fight out everything they want. They cannot do it by holding a nuclear weapon which in the end they cannot use." Buffett also mentioned he was confident Congress will work out a deal this week to avert defaulting on U.S. debt.
The U.S. government risks undermining confidence in the role of the U.S. dollar as the global reserve currency if an agreement is not worked out between President Obama, the U.S. House of Representatives and the U.S. Senate. The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy. It will also have some detrimental effect on the U.S. economy.
The Fitch announcement went on to say:
"In the event of a deal to raise the debt ceiling and to resolve the government shutdown, which Fitch expects, the outcome of a subsequent review of the ratings would take into account the manner and duration of the agreement and the perceived risk of a similar episode occurring in the future. It would also reflect Fitch's assessment of the following main factors:
- The impact of the debt ceiling brinkmanship and government shutdown on our assessment of the effectiveness of government and political institutions, the coherence and credibility of economic policy, the potential long-term impact on the U.S. sovereign's cost of funding and cost of capital for the economy as a whole, and the implications for long-term growth.
- Our assessment of the prospects for further deficit-reduction measures in future years necessary to contain government deficits in the face of long-term spending pressures and place public debt on a downward path over the medium to long term."