Friday, January 11, 2008

Could U.S. Debt Be Downgraded?

The bond rating agency Moody's is thinking the unthinkable. As the New York Times reports, it has publicly questioned its Aaa rating of United States debt:
In a warning shot fired at Washington, one of the nation's leading credit-rating services announced late today that it was considering lowering its rating for $387 billion in Treasury securities because of its growing fear that the budget deadlock of Congress and the White House could lead the Government to run out of money by the end of next month.
Wall Street executives said the announcement, which came late this afternoon as the bond market was closing, was clearly an effort to force the White House and Republican leaders in Congress to resolve their differences over raising the debt limit, the Congressionally set ceiling on Government borrowing.
Late last year, the other major ratings service, Standard and Poor's, warned that Washington's political gridlock could result in placing the United States on a general "credit watch" list.
The warning itself, they said, could force down the price of the specific United States bonds named by the agency, Moody's Investors Service Inc. And it would signal that the United States might soon have to pay more to borrow money.
It has been a while since we heard the upbeat chatter about Bush being our first MBA president. Chief executives are expected to take responsibility for financing their enterprises. But as I observed back in 2005, perhaps Bush slept through class the day the finance professor told students to never talk down your own securities:
The president drew a laugh when, in arguing that big changes are needed, he spoke disparagingly of "the paper i.o.u.'s in a file cabinet in West Virginia" that make up the $1.7 trillion Social Security trust fund. He did not point out those i.o.u.'s are Treasury securities backed by the full faith and credit of the United States, and that the government has never defaulted on its obligations.
It has been ten long years since our president stood in front of Congress and spoke confidently of "surpluses as far as the eye can see." Those with long memories may recall that he spoke of using the surpluses to shore up Social Security. Bonus points if you remember that the U.S. Treasury had to resurrect the long bond in 2005 to finance Bush's deficits. Now it's deficits as deep as we can dig, to the point at which the cost of servicing U.S. debt could go up.
Robert Rubin, who served as treasury secretary under Bill Clinton, understood why deficits matter, and summed up his reasoning in a NYT op-ed in 2005:
Virtually all mainstream economists agree that, over time, sustained deficits crowd out private investment, increase interest rates, and reduce productivity and economic growth. But, far more dangerously, if markets here and abroad begin to fear long-term fiscal disarray and our related trade imbalances, those markets could then demand sharply higher interest rates for providing long-term debt capital and could put abrupt and sharp downward pressure on the dollar. These market effects, plus the adverse impact of continuing fiscal imbalances on business and consumer confidence, could seriously undermine our economy.
Dick Cheney famously said back in 2001 that "deficits don't matter." It seems that Iraq is not the only example of how ideology has blinded these folks to the risks they have incurred on our behalf.


Anonymous Anonymous said...

I don't think that laughing over the Social Security trust fund's IOUs is entirely talking down US securities. The problem is that future social security obligations will be the obligation of the US tax payer, and the "paper i.o.u.'s" will be the obligation of the US tax payer, so the i.o.u.'s are useless as a surplus to pay future social security obligations.

10:49 AM, January 11, 2008  
Blogger Tom Noyes said...

Our government pays its debts, whether that debt is held by foreign investors or by Social Security on our behalf. The i.o.u.'s are useless if the federal government is unable to make good on them, which hasn't happened in more than two centuries.

10:56 AM, January 11, 2008  
Blogger Nancy Willing said...

Great post, wonk. Too bad it is so freaking depressing.

11:49 AM, January 11, 2008  
Anonymous Anonymous said...

We all knew, that if ever our debt rating were to decrease, it would be during the time the Republicans were in charge of steering the ship of state.

Their economic plan is just stupid.

5:09 AM, January 15, 2008  
Anonymous Anonymous said...

Of course the USG will pay off its debts...with paper dollars, also known as Federal Reserve Notes.

Coca-Cola in 1975= 10 cents; Coca-Cola in 2008= $1

Further, the statement that the US has not defaulted in "more than two centuries" is not really true. See
Perry v. United States, 294 U.S.330 (1935), when the default on T-Bonds was upheld by the Supremes.

11:25 PM, January 28, 2008  
Anonymous Anonymous said...

Wait a minute. The article says it was published 1-25-1996!

I don't think Clinton is still President. I am fairly sure that Newt is not Speaker of the House anymore.

Forgive me for not catching this the first time.

11:48 PM, January 28, 2008  

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