In case anyone had forgotten, Moody's Investors Service issued a stark reminder Tuesday that the federal government is speeding headlong toward a political and financial cliff. On Jan. 1, a number of temporary tax cuts are due to expire just as new spending restraints kick in, pulling hundreds of billions of dollars out of the U.S. economy and potentially triggering another recession. At the same time, Washington is expected to reach the limit of its borrowing authority, necessitating another increase in its debt limit. If lawmakers and the White House can't reach a budget deal that effectively manages those problems, Moody's said, it expects to downgrade the federal government's credit rating.
That might seem unduly pessimistic if so many congressional Republicans hadn't called for the government to stiff its creditors last year instead of raising the debt ceiling. One of the three major ratings agencies, Standard & Poor's, downgraded U.S. debt after that acrimonious episode; now, Moody's is threatening to do so as well.
Considering the sorry state of other governments' finances, even downgraded U.S. debt is likely to remain attractive to investors in search of a safe harbor. But once the global economy improves, the ratings downgrade could force the Treasury to pay higher interest rates, which would only make it harder for the federal government to close its budget gap.