Federal Debt – a spreading fire?

Vanguard discussed the possibility that Moody’s Investors Service may be the second major credit agency to downgrade U.S. government debt. If lawmakers are thought to be unable/unwilling to control government debt, Moody’s may remove the federal government from the top of its credit scale.

In August 2011, Congressional wrangling on federal borrowing limits helped prompt Standard & Poor’s to downgrade U.S. government debt. Standard & Poor’s pointed out that the Congressional struggles would lead to more debt. The 2011 S&P downgrade had minimal effect on both the stock market and Treasury yields because U.S. Treasuries are perceived safe and are the world’s deepest and most liquid bond market.

A downgrade by Moody’s is not expected to put pressure on lawmakers to resolve differences because of the current low yields on U.S. Treasuries. This could prolong reaching agreement until debt levels become so high that debt is a significant burden to growth.  Moody’s is concerned with both the “fiscal cliff” of expiring tax reductions and a status quo that looks unsustainable.

Bottom line: should the U.S. rush to create a deficit reduction program? Yes. Does it have to do it right now? No.

Vanguard Markets & Economy

It looks like the fiscal cliff is of concern to real estate sales but most likely local job growth will have much more impact.

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