Ensuing is an instruction review of whether further credit downgrades will force the Government to significantly raise interest rates, and other consequences.
If there is another, or more than one credit downgrade by Moody’s and Standard and Poors in the next year or two, there is an elevated risk investors of Government treasuries will demand higher interest rates. If this very real prospect occurs, the consequences are enormous.
Once higher rates are demanded, the government will be forced to spend a greater percentage of it’s revenues on interest, causing it to spend less on other normal budget items. Further, the longer the government continues to deficit spend at this point, the percent the government spends on interest on debt will accelerate more quickly.
There will be much greater pressure at this point to reduce deficit spending because of higher rates. In order to accomplish lower spending, Government will be under intense pressure to cut spending.
The problem at this point is that due to the size of the deficit, spending cuts will not be enough & if the government even attempted to solve the problem with spending cuts, the cuts would be so massive, they would likely cause a severe recession. Therefore, significant revenue increases would have to occur.
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