The future deficits are far worse than we have been assuming for a couple of reasons. First, the newly weakened economy, as shown by worsening unemployment and GDP growth numbers, will hurt tax revenues for the next few years. Current deficit projections plugged in higher revenues than we are now going to experience.
Secondly, as KIBU mentioned, interest rates are now unnaturally low, dampening the servicing costs on our $14 trillion of debt. This is due, of course, to our Bernanke policy of aiming for near-zero interest rates. If government bond and T-bill rates return to their average of the last ten years or so, they the government’s interest expense will soar, thus worsening the deficit.
Finally, the S & P spokesmen I’ve seen on the news programs today readily admit that they took the recent political wrangling into account in making their decision. They quite reasonably decided, as did most citizens watching the circus, that our politicians had an awful time lowering the (future) deficit by a puny amount. Further, the so-called cuts were back-loaded toward the end of the ten-year period, with almost noting cut in the next year or two. And entitlements, which dwarf defense and other discretionary items, were not even touched.
S & P’s job is to evaluate risk, and they took economic trends and political realities both into account.
