Econ 101 – 2011 Federal Budget Deal
Now it makes sense
Shared by Glenn Welker and http://www.dailyfinance.com
Condensed by Native Village
Harry Reid is calling 2011's Federal Budget deal a “historic amount.“ The President said it is a “historic deal.” John Boehner said, “We’ve come to an agreement."
Is it a good deal? You do the math:
Remove nine zeros from the Federal Budget Deal, then pretend it's your family's new monthly budget.
2011 Federal Budget Deal
|Your 2011 Family Monthly Budget:
Amount your family spent : $3,820
Total income for your family: $2,170
New debt added to your credit card: $1,650
Amount Cut: $38.00 - only 1%
Outstanding credit card balance: $14,271
Standard & Poor's now gives the United States a credit rating at AA+. It's the first time the U.S. Treasury has ever lost its pristine AAA rating.
A credit rating is Standard & Poor's opinion on the creditworthiness of an obligor. Over the years, investors have accepted credit ratings as tools for determining credit quality.
For months, the United States has been warned of possible ratings change. Agencies told them to get their fiscal house in order and keep political cage matches away from serious economic issues.
But Washington didn't listen. And Standard & Poor's didn't beat around the bush when describing why America's credit rating was dropped:
The political climate of America's governance and policymaking is now less stable, less effective, and less predictable than previously believed.
The differences between political parties are extraordinarily difficult to bridge.
The statutory debt ceiling and the threat of default became political bargaining chips in the debate over fiscal policy.
The agreement fell well short of the fiscal consolidation program that some proponents envisioned.
Republicans and Democrats only agreed to modest savings on discretionary spending. They delegated more comprehensive decisions to a Select Committee.
New revenues have dropped down on the menu of policy options.
The plan envisions only minor policy changes on Medicare and little change in other entitlements. Containing these are key to long-term fiscal sustainability.
Standard & Poor's also hinted that America's rising debt is almost equally due a jump in spending and a drop in tax revenue. In the new Federal budget the wealthiest Americans will not pay more taxes.
What does this mean for markets? In the short term, don't panic. It's about investors expecting that other investors will be panicking.
Longer-term, the downgrade could mean a jump in interest rates. This could slow economic growth and add trillions of dollars to the national debt in higher borrowing costs.