We’re off to see the wizard . . . Debt ceilings, credit downgrades, and a collapsing market oh my! Feels a bit lately like the U.S. is having a bad dream. Like we woke up in Oz and the Wicked Witch took over. Wake me up from this nightmare! Many politicians probably wish they could click their heels and make it all go away. The truth remains that our fiscal problems are here for the long haul unless urgent changes are made. When you borrow from Peter to pay Paul, as it is in life, choices have consequences. The U.S. is now facing some tough times ahead because of poor choices… Let us quickly get up to speed on where we are: 1. First we battled over raising the debt ceiling. The August 2nd debt ceiling deadline came and went as the Treasury reassured the world financial markets that U.S. would not default on her debts. This was too close for comfort! When all the dust finally settled, it was determined by the non-partisan Congressional Budget Office that the federal deficit will be reduced by at least $2.1 trillion . Yet it is still uncertain where the majority of these cuts will be made. We will definitely see defense and non-defense programs reduced by $741 billion over a 10-year period, which includes a $350 billion cutback in defense spending at the Pentagon. There will be an additional $156 billion in savings from lower interest costs on servicing our existing National Debts. Another $20 billion will be cut from education loan initiatives and through efforts to identify fraud and abuse in other mandatory federal programs. (Student loan funding will be reduced to $22 billion by 2021, but Pell Grant funding will increase by $5 billion by 2015.) A bipartisan committee of 12 will have to recommend between $1.2 trillion and $1.5 trillion in additional federal budget cuts by November 23rd. This bi-partisan committee will be responsible for looking at Social Security , Medicare and Medicaid and any other line items that can add some bang for the buck. The committee consists of : House Minority Leader Nancy Pelosi (D-CA) & Senate Majority Leader Harry Reid (D-NV) who will each get to select three Democrats. House Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY) who will each get to pick three Republicans. Congress has to vote on their recommendations by December 23rd. If the bill is defeated, then automatic budget cuts will kick in on January 2, 2013 – at least $1.2 trillion worth, divided almost evenly between defense and domestic spending. (Social Security, Medicaid, military pay and veteran’s benefits would be exempt; Medicare would not be, according to House Speaker Boehner.) In addition, a Congressional vote on a balanced budget amendment to the Constitution will occur before the end of 2012. An approved balanced budget amendment would have to be ratified by two-thirds of the states. So in short, the debt ceiling will be raised by up to $2.4 trillion on top of the existing $14.3 trillion debt we already have! We essentially kicked the can down the road and did not address the world’s major concern: How will the U.S. get back on solid financial footing? 2. Next: the Standard & Poor’s downgraded the U.S. Credit rating. Think of this like a credit score. You go out and max out all your credit cards and don’t get a new job to pay them off . The result? Your credit score will sink like a rock. That is how it works for individuals like you and me. Why shouldn’t the U.S. and every other country have the same accountability? Standard & Poor’s downgrade of U.S. debt on August 5th was more symbolic than surprising. It put on paper what we already know: The U.S. is not the same invincible superpower that she once was. Our flawless AAA rating that we have held since 1941 was reduced to a AA+ rating. Why did this happen after we solved the ceiling crisis? Well the S&P thought it was “too little, too late”.The rating agency sent out a preliminary warning that the deficit reduction needed to be at least $4 trillion to keep the top rating and the debt ceiling compromise was barely half of the needed amount. They also maintained a “negative” credit outlook on the U.S, essentially saying they don’t see any signs of improvement for the future. Deficits occur when you spend more than you make. It’s as simple as that. The S&P rating agency is not confident that the U.S. can collect enough tax revenue to meet its spending obligations. The spending cut battles will continue into the foreseeable future or else the U.S. will continue to see its credit ratings fall further. Who really cares what the S&P has to say? Standard & Poor’s are the same rating agency who neglected to alert investors that Enron, General Motors, and Lehman Brothers were about to collapse. I don’t take what they say with too much confidence. What matters most is what our creditors think. We are a slave to the lender. China, who is the largest holder of U.S. debt called a “spade” a “spade”. They stressed that the U.S. has a “debt addiction” only curable via major cuts to defense spending and entitlement programs. It also said that the option of a “new, stable and secured global reserve currency” should be explored. This, by the way, is what we have been predicting at Faith-Based Investor . We have been warning that the dollar will eventually be replaced by a new world currency and this will have a severe impact on the lifestyle of Americans. Expect a minimum of 25-30% reduction in your lifestyle if this happens. We have been suggesting precious metals like silver and gold along with stable foreign currencies to hedge against the replacement of the dollar… (As always do your own research before purchasing any assets). 3. The markets don’t like uncertainty! With the United State’s fiscal problems, combined with the credit downgrade, along with debt troubles in Europe, supply issues in Japan, economic slowdown in China, and unrest in the Middle East, investors have to pick their poison. We have seen the world markets tumbling on a daily basis. There is no shortage of troubling news right now. However, there are also tremendous buying opportunities for those who are paying attention. Hopefully this article will have caught your attention and opened your eyes to some of the troubling possibilities down the road. The U.S. is not as safe as she once was. I don’t believe she will collapse, but her days as the world’s top economy are severely numbered unless urgent, radical changes are made today not later on down the road… I believe America can regain her greatness, but she needs to get back to her roots of God first and a desire to look after fellow man. When we stray so far from God, and spend more than we make, it is impossible to move in the right direction. Yet with His grace, and our desire to turn the ship around, that is the true “hope” and “change” we truly can believe in! What are your thoughts? What will it take to turn America around? Related Articles: Government and Finances Can the U.S. Solve its Debt Problems? Winning Defensive Financial Strategies (Part 1) Is Debt Consolidation a good idea? The Small Business Jobs Act: How Will You Benefit? Is the Obama tax cut really going to help? Dealing with Debt Collectors – FPU Review #5 Jay Peroni, CFP® is author of The Faith-Based Millionaire , Chief Investment Officer at Faith-Based Investor , and host of the Rethink Wealth radio show . His life passion is helping individuals and businesses keep Christ first in the investment and financial planning process. As a thank you for subscribing to our newsletter you can download our quick eBook ” 25 Ways To Save Money in 2011 ” for FREE! The articles on this site are for entertainment purposes and should not be taken as financial advice. Please contact a financial professional for specific advice regarding your situation. Also, many of the CPF articles help us pay the bills by using affiliate relationships with Amazon, Google, eBay and others. Find out more here .
What in the World is Going On with the United States?