Standard and Poors, fresh off their outstanding performance rating mortgage backed securities, needed to regain relevance in the market so they issued a negative report on US Government debt. The Treasury must have missed a payment to them to rate some bonds and S&P wanted to show who is boss. The quickest way to get publicity and get people talking about you is to make a political statement about US debt on Tax Day.
It is important to ask: What does a bond rating really mean?
Given the recent performance of rated bonds including low rated state bonds that have not defaulted and high rated corporate bonds that have defaulted, the short answer is that a rating is worth the paper it is printed on. Indeed it seems clear that if the bond ratings companies honestly rated their ratings they would all receive Junk ratings.
All of this raises a second question: How bad is the US deficit?
The short answer is unsustainable. Consider that the complete elimination of Social Security payments (and not the associated payroll taxes) would not eliminate the deficit. The complete elimination of the Defense Department would not eliminate the deficit. And even if tax rates are high, income taxes collections barely cover the cost of the the Defense Department alone. Any competent financial advisor when confronted with a household budget of this nature would suggest two actions: cut luxuries, increase income. The notion that cutting taxes produces an improvement in the economy and increased tax revenue has been proved so wrong that those who persist in such statements are deluding themselves and the public.
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