Where is the US economy headed?

You must be talking about before we had religion!

religious oppression ending and government oppression starting.

Flash! Standard and Poors just downgraded the credit rating for the U.S. from AAA to AA+'

and the bond markets yawn. Bloomberg reports minimal yield changes that are well within the range of statistical noise.

The problem can't be cured with higher taxes.

True, but it is a reflection of our relatively large public debt as a % of GDP; a large current deficit; and a chronic annual increase in government spending (even after the budget deal) that is growing faster than our GDP.

I think the markets are justified in ignoring them.

A mathematical error discovered late Friday by Treasury Department officials has thrown into limbo — at least temporarily — plans by ratings firm Standard & Poor’s to downgrade the top-notch AAA credit rating the U.S. has held for 70 years, people familiar with the matter said

After two hours of analysis, Treasury officials discovered that S&P officials had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes.

S&P officials later called administration officials to say they agreed with the administration’s critique, though they did not say whether it would affect their rating. White House officials remained waiting Friday evening to see what the company would do

Is the U.S. Credit Rating a Victim of GOP Sabotage?
By Daniel Gross | Contrary Indicator – 13 hours ago

The fiscal clown show continues. A few days after Congress and the White House agreed to raise the debt ceiling and cut spending, Standard & Poor's has downgraded the United States of America's credit rating from AAA to AA+.

S&P, which covered itself in a substance other than glory during the mortgage crisis, may have a poor record and strange methodology when it comes to sovereign ratings. France, which has a far higher debt per capita ratio than the U.S., still enjoys a AAA rating. And a downgrade, alone, doesn't mean U.S. interest rates will spike -- on Monday or at any time in the future. Japan's credit rating was downgraded several years ago, when the interest rates its government paid on bonds was already extremely low, and they've generally trended lower in the years since.

Market conditions, the trajectory of economic growth and relative value can play as big -- if not a bigger -- of a role in determining interest rates than a rating.

But that doesn't mean we should ignore S&P's Friday evening shot across the bow. In downgrading the U.S.'s credit rating, S&P points out what has long been obvious: Washington's inability to come to an agreement on how to close the large fiscal gaps that have emerged since the recession began is troubling. Recent events have sapped the agency's confidence that the government can and will do what is necessary to align revenues with spending commitments. And it's difficult to escape the conclusion that America's credit rating was intentionally sabotaged by Congressional Republicans.

It has long been obvious to all observers -- to economists, to politicians, to anti-deficit groups, to the ratings agencies -- that closing fiscal gaps will require tax increases, or the closure of big tax loopholes, or significant tax reform that will raise significantly larger sums of tax revenue than the system does now. Today, taxes as a percentage of GDP are at historic lows. Marginal rates on income and investments are at historic lows. Corporate tax receipts as a percentage of GDP are at historic lows. Perhaps taxes don't need to rise this year or next, but they do need to go up in the future.

Otherwise, the math of deficit reduction simply doesn't work. And that's how the deficit reduction deals signed off on by Republican presidents like Ronald Reagan and George H.W. Bush came about.

Yet the action in Washington in the past year has all gone in the opposite direction. President Obama deserves some of the blame. Several months ago, he struck a deal with Congress to make the fiscal situation worse -- extending the Bush tax cuts for two more years and enacting a temporary cut in the payroll tax.

But Congressional Republicans deserve much more of the blame. For this calamity was entirely man-made -- even intentional. The contemporary Republican Party is fixated on taxes. It possesses an iron-clad belief that the existing tax rates should never go up, that loopholes shouldn't be closed unless they're offset by other tax reductions, that the fact that hedge fund managers pay lower tax rates than school teachers makes complete sense, that a reversion to the tax rates of the prosperous 1990's or 1980's would be unacceptable.

In the past two years, this attitude has combined with a general hostility to playing ball with Democrats on large legislative issues, a near-blanket refusal to conduct business with President Obama, and, since the arrival of the raucous Tea Party freshman, a cavalier attitude toward the nation's obligations. It was common to hear duly elected legislators argue that it wouldn't be a big deal if the government were to pierce the debt ceiling and default on its debts.

This downgrade is the logical outcome, to a degree, of the long-running "Deal or No Deal" dynamic in Washington. For much of the last two years, President Obama and various fiscal reform groups have urged a grand bipartisan deal that would make a dent in the short- and long-term deficits. Every group -- from the bipartisan Bowles-Simpson Commission on down -- argued that a large package of spending cuts and tax increases or reforms would be the way to go. Polls showed that American voters generally endorsed a mix of spending cuts and tax increases. And plenty of neutral observers thought that the approach of the debt ceiling expiration would help forge a grand bargain.

Many observers (including this one) argued that such efforts were doomed to failure. For President Obama, all the incentives weighed toward making a big deal, even one that would upset his base. It would show an ability to work on a bipartisan basis and make concrete progress and take the issue off the table for 2012. But for Republicans, all the incentives weighed against a big deal. By definition, anything that is acceptable to President Obama and Democrats is unacceptable to today's Congressional Republicans. It almost doesn't matter what the substance is. Why would they sign off on any measure that would include revenue increases that the president wanted? Congressional Republicans don't believe in higher revenues as a matter of ideology, as a matter of economics or, most importantly, as a matter of political tactics. Top Congressional Republicans have expressed a desire to deny victories to the president.

And so, in a completely predictable pattern, every time the discussions got around to revenue increases, Republicans pulled back. House Speaker John Boehner was willing to entertain the possibility of several hundred billion dollars of increased revenues, until he realized he couldn't sell it to his own caucus. The anti-tax radicalism of the Congressional GOP took revenues off the table and made a large deal impossible. The result was a lengthy manufactured crisis and a small deal that relied solely on spending cuts, and even that was opposed by a big chunk of the House GOP caucus.

Judging by S&P's release, this needless brinksmanship and effort to take the debt ceiling hostage seriously influenced the agency's thinking. It didn't like the theatrics, and it didn't like the outcome. While the deal took default off the table, the agreement "falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade." In other words, S&P downgraded in the U.S. in large measure because the recent debt deal didn't do enough to stabilize finances.

The irony, of course, is that the very attribute that pushed S&P to downgrade -- the inability of the U.S. political system to agree on large topics -- may help improve the fiscal situation. At the end of 2012, the Bush tax cuts are slated to expire. If the two parties fail to agree on some very controversial issues in the midst of an election year, taxes will rise across the board, on income and on investments, producing trillions of dollars in revenues over the coming decade.

Daniel Gross is economics editor at Yahoo! Finance.

georgeob1 wrote:

True, but it is a reflection of our relatively large public debt as a % of GDP; a large current deficit; and a chronic annual increase in government spending (even after the budget deal) that is growing faster than our GDP.

First of all, I'm not sure it's a reflection of anything. Standard and Poor doesn't follow any transparent procedure in assessing credit risk, and the seat-of-the-pants judgments it does render are untrustworthy. Remember, these are the same people who gave investment-grade ratings to all kinds of shady mortage-backed securities just five years ago. Why should they be doing any better this time? I think the markets are justified in ignoring them.

Also, the S&P is the only agency to downgrade America's credit rating.
The other agencies have not, at least not as far as I know.

The lives we lengthened with colonial enterprise must run into trillions.