Are We Smarter than a Fifth Grader?

Standard & Poor’s (S&P) is a United States based financial services company and a division of the McGraw-Hill Companies (MHC). MHC publishes financial research and analysis on stocks and bonds, and S&P is one of the the big three credit rating services that includes Moody’s Investor Service and Fitch Ratings.

MHC, financially stable, has paid a stock dividend since 1937. In 2007, their stock was hovering around $60 per share at the beginning of the recession. The stock dipped to less than $20 per share and began a steady over $40 per share. The stock did not budge last Thursday, the day the Dow Jones Industrial Average (DJIA) fell 512 points. The DJIA has fallen 1300 points since the first of the year, whereas MHC has dramatically risen from $36 a share to almost $42 at the close Friday.

The rating business seems to be a good business to be in right now, but what is the purpose of the rating system? The purpose of ratings is to provide investors with information to assess the financial potential of a business entity to pay-off its creditors.

In this case, S&P down graded the ability of the United States to pay back its national debt. Prior to last Friday, the United States had enjoyed a AAA rating since 1917, the highest rating S&P gives. They downgraded the US to AA-plus, a rating not nearly as desirable for investors.

An S&P written statement on the downgrade read, “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

The downgrade follows infighting in Congress over whether to raise taxes or cut spending to reduce the government’s debt burden. A time limit on the national debt came dramatically close to default before both sides of the legislature acknowledged the government did not have the money to pay both the budget and debt payments without increasing the borrowing limit.

President Barack Obama signed legislation to end the controversy on August 2, 2011, the day the national debt payments were due. The new law is designed to reduce the deficit by $2.1 trillion over 10 years. These figures did not meet S&P’s suggestion of reducing the deficit by $4 trillion, an amount S&P said was “a good down payment” on fixing America’s financial woes.

This is not the first time in U.S. history that Congress has waited until the last minute to settle its budget and debt ceiling. In fact, in modern history, Congress has a paper trail of procrastinating over the national debt. My question is why is S&P just now responding to the national debt?

The United States has been in debt over a trillion dollars since 1980. Under President George W. Bush, the national debt increased by $6.1 trillion.

Any good fifth grade math student can decipher whether we can continue to pay our debts if interest rates go up, so I wonder if we are smarter than a fifth grader. We should have been downgraded years ago, but why weren’t we? Is S&P’s new found concern reflecting their general interest in America’s overall condition or is it a political statement for control on how Congress and the Administration handles finances?

Whatever it is, creditors and debtors have similar issues for control. Creditors, who are doing well financially, often cannot see the debtor’s side of the issues, and debtors often can’t see the creditor’s side of the issues. When decisions are made by the creditor to force the debtor to do what they think he or she should do about the debt, bankruptcy filings normally follow.

When you can’t agree on debt solutions with your creditors, filing for bankruptcy can be a viable option. You may need a bankruptcy lawyer to help you understand how these options might apply in your particular circumstances.

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