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The wheels are coming off

Posted by Richard on April 19, 2011

Herb Stein famously said, "If something cannot go on forever, it will stop." Today, Standard & Poor's sent Washington the message that the borrowing has to stop soon:

The ratings agency Standard & Poor’s warned the United States on Monday that it could lose its coveted status as the world’s most secure economy if lawmakers don’t rein in the nation’s nearly $14.3 trillion debt. 

The finding, the first of its kind in the 60 years that S&P has been judging the country’s credit quality, sent a jolt through the markets and injected a new sense of urgency into the debate gripping Washington over whether to allow the Treasury to keep borrowing.

S&P changed its outlook on the United States from “stable” to “negative” and said the federal government could lose its AAA rating if officials fail to bring spending in line with revenue. 

The negative outlook means that the US might lose its AAA credit rating within the next year or two.

If you think the deficit problem can be solved by taxing the rich a little bit more, please see my previous post

If you think the Chinese, Arabs, and private investors won't let a downgrade dampen their demand for US debt, note that PIMCO, the world's largest bond manager, is now shorting Treasuries — that is, betting that they'll lose value. 

But not to worry! The Federal Reserve is already buying 70% of US Treasury notes with money it creates out of thin air. Geithner can just crank up the printing presses and buy even more. Look how well that worked for Zimbabwe!

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