The United States' financial credibility is on thin ice, according to the IMF and the credit rating agency Moody's. Uri Friedman at The Atlantic Wire provides a nice round-up of opinion and commentary on the issue.
My reaction? Don't panic. Instead, plan. Our credit rating is still gold, and it will continue to be gold for the foreseeable future, as there is practically no indication that strong demand for our debt is waning. On the contrary, the recent rise in our medium term interest rates is perfectly consistent with the brightening outlook of the U.S. economy. When investors expect a market to pick up, they demand higher yields to protect them against the inflation that often joins economic expansion. That's the story for today.
But there's no reason to think that, with public debt realistically expected to equal GDP by the end of this decade, our credit rating will be gold forever.
Fiscal crises are like natural disasters. Nobody knows when they are going to strike but it's useful to insure against the likelihood that they will. For the United States, insurance against a fiscal hurricane would look like medium term deficit reduction. What kind of deficit reduction? A broad bipartisan deal to (1) offset investments in infrastructure and R&D with discretionary spending cuts and (2) reform Social Security and tax expenditures in the medium term.
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