While talks on the fiscal cliff stalled at the end of last week, a Bloomberg Survey suggests a majority still believe a deal will be reached in time to avoid the fiscal cliff. Obama and Geitner put forth a plan that would raise taxes as well as add additional spending that would do nothing to stem the tide of our growing deficit. Regardless of what transpires, it seems more and more likely that we will be getting a downgrade to our debt in January 2013. Even if a deal is reached, any proposed cut in spending won’t be done for years after Obama leaves office.
Additionally, Obama wants the ability to raise our debt ceiling in perpetuity. This would be a dangerous transaction with no checks and balances and could push our economy over the brink. The first US downgrade of debt did not scare foreign governments enough to stop supporting our bad spending habits, but that will not last forever. A second downgrade would damage our credibility and our ability to issue debt at these low interest rates. If our interest rates go up drastically, we may get into a position where we can no longer service our interest payments. We believe severe cost cutting must be done.