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S & P Downgrade of the U.S

Let’s make clear what is happening today, what relationship this bears to the Standard & Poor’s downgrade of the U.S. financial system, and how it affects your plan for retirement.

There is some legitimacy to the concern over the debt rating reduction. For as long as anyone can remember the United States of American has been the gilt-edged standard of financial wherewithal and responsibility (70 years to be exact). To be downgraded, though somewhat symbolic, is a shock to the system.

S&P’s concern is the amount of debt we now have; in excess of $14.5 trillion today, which is $ 4 trillion more than just 30 months ago, and increasing at a DAILY rate of $4.5 billion. That’s right; the U.S. is borrowing $4.5 billion every single day. What is interesting here is that S&P (along with Tea Party members and supporters) seem to be the only ones concerned about this current, and ever increasing, debt level.

Warren Buffett seems to think this is no big deal. Senate and House Democrats characterize this as the Tea Party downgrade, replacing their normal scapegoat George Bush with the only group of Congressmen who see the ballooning debt as a serious problem.

The DEBT is the problem; the downgrade is only the symptom. The rating agencies really messed up when they rated subprime mortgage loans and derivatives as AAA before the financial crisis. Now, when they down grade U.S. debt, which should be rated lower than AA+, the same people howl from the other side of the issue.

If Social Security and Medicare were required to report their financials in the same fashion companies and pension plans are, FASB and PBGC would be taking over the operation of the government. FASB is the agency that requires companies to place the present value of their future liabilities as an entry (negative item) on their balance sheets. PBGC does the same for defined benefit retirement plans. When a pension plan is mismanaged PBGC sets in and takes over.

The present value of U.S. future Social Security and Medicare liabilities is estimated to be $61 trillion. These benefits must be scaled back in some form or fashion.

The downgrade does contribute to the market reaction today and over the past couple weeks, but it is only a small part. A major cause today is the soon to be apparent unraveling of the European Union, with Greece already consuming two bailouts without achieving a solution, Italy on the ropes (the third largest European economy), and other nations soon to follow.  For this reason, U.S. interest rates are more likely to go down in the near term, than increase - currently the U.S. is the least offensive smell in the room.  Moreover, U.S. interest rates actually dropped today...

Another major part here is the fact American politicians do not see, which the financial markets now do see, the unraveling of the EU as portending what will happen in the U.S. without significant financial changes. For crying out loud, Italy last Friday promised to pass a constitutional balanced budget amendment. Where is the U.S. leadership in this issue? Our President and Democratic majority refused to include this much-needed provision in the debt ceiling talks, which is why a stop gap measure of dubious value was passed instead.

Another major part of the issue is the failure of the U.S. government to craft and implement a legitimate growth plan which includes lower taxes and a common sense, effective regulatory plan. The U.S. corporate income tax is the highest of any developed/developing nation. It’s no wonder that billions and billions of dollars are being redeployed to other more tax hospitable locations such as China and India (all subjects of which I’ve written about before in this column).

As for your retirement, we have prepared for what is taking place. The market reaction will force a serious discussion about these issues and require changes. The good news is we are positioned to respond appropriately as things calm and legitimate opportunities present themselves.  Do you need a new source for your retirement advice?  Email or call me.

Read the original blog entry...

More Stories By Dana Barfield

Dana is the president of The Barfield Group, which has provided industry leading Financial Advice, Investment Services, and helped people Plan for Retirement for more than 20 years. He is a frequent speaker and writer for a variety of industry, regional, and national publications on business ownership and wealth building related topics.

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