The most famous downgrade ever

Standard and Poor lowered last Friday the U.S. government’s credit rating for the first time to AA+ from AAA. Yesterday the Ratings Agency also downgraded the credit ratings (from AAA to AA+) of Fannie Mae and Freddie Mac and other agencies linked to long-term U.S. debt. The agency also lowered the ratings for: farm lenders; long-term U.S. government-backed debt issued by 32 banks and credit unions; and three major clearinghouses, which are used to execute trades of stocks, bonds and options.

All of a sudden everybody is talking about the US debt. We know that China (26.1%), Japan (19,9%), and United Kingdom (6.1%) are the main holders of US debt (as of December 2010). And we know too that the US debt is growing, a lot. But, why is the US debt that big?

A big big debt

The US has an enormous debt, in terms of its absolut size (more than $14 trillion, 101% of its GDP), which has grown sevenfold in the last 20 years. Between 1980-88, under Carter and Reagan Administrations, the US national debt tripled, from $712 billion to $2 trillion.  The debt was reduced under Clinton Administration but it went up again after George H.W. Bush performance, reaching $5.8 billion in 2008. Then, the financial crisis came up and the US debt soared. Tax cuts and stimulus spending were behind the 10% GDP federal government budget deficit, which provoked the new spike on the figure.

Despite Social Security expenses are explaining a big portion of the graph shown on the top of this article, a bigger portion of the US debt is due to financial related costs. So, adding up the numbers we can see how financial costs ($5 trillion), social costs ($3,87 trillion), tax related costs (-not exactly costs but revenues that never took place-, $2,769 trillion), and military costs ($2,391 trillion) are the ones which explain 84% of the total US current debt.

A new debt ceiling (+$2.4 trillion)

Last July 31, in order to tackle the forecoming expenditures, President Obama and Congressional leaders of both main US parties announced an agreement that would raise the nation debt ceiling (set at $13.4 trillion) by up to $2.4 trillion in two stages, enough to keep borrowing into 2013. The pact called for at least $2.4 trillion in spending cuts over 10 years, with $900 billion in across the board cuts to be enacted immediately.

What is the debt limit?

The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.

This is a nonprofit explanation

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