Why Every American Should Be Concerned About US Bond Rating
Thirteen months ago a report issued by Moody's raised concern among treasury department officials and financial analysts on Wall Street. Since US debt was first assessed in 1917, the United States has enjoyed a AAA rating by Moody's and an unique position as the strongest bond issuer in the world. However, in January of 2008, A Moody's report warned that if the United States failed to take corrective action concerning it's fiscal policies the country would face a ratings downgrade. Although the report cited the need for corrective action, the report also cited that based upon current obligations a ratings decrease could occur as early as 2012. At the time the report warned that Social Security and Health Care expenses posed the greatest threat to the United States' rating.
That was one year ago, and since that time the Treasury Department has issued trillions in new debt while Congress, President Bush and now President Obama have committed trillions to industry bailouts and the Economic Recovery and Reinvestment Act.
On Monday, Moody's issued a new report alluding to the new reality that the Economic Stimulus Package, accompanied by another $2 trillion in US Treasury issues, has now led to a deterioration in the United States ability to repay it's debt. Although Moody's did not specifically warn of an impending downgrade, the report and analysts with Moody's did present statistical data that the U.S. may soon find themselves weaker than fellow AAA countries such as France, Germany and Canada. According to sovereign credit analyst at Moody's, Steven Hess, ""By the end of a two year period, the U.S. debt ratios will be higher and moving the country's metrics to the lower end of the pack..."
According to the Moody's based upon current spending and obligations, the United States is on pace to a debt level of nearly 62.4% of GDP by the end of 2010. As a comparison, German debt-to-GDP ratios are on track to reach just 47%. Although Moody's and other ratings agencies are not likely to downgrade our bond rating any time soon, the agencies are sounding alarms that every American should pay attention too.
Why is our credit rating important?
Simple. Just like your own credit rating, the ability to repay debt is the most important issue concerning a countries ability to run it's operations. A weaker bond rating simply means that the pool of potential purchasers will shrink, as bond purchasers look for safety. Likewise, in order to attract potential bond buyers a Country with a weaker credit rating will have to issue debt at higher interest rates. The domino effect of rising interests rates in U.S. debt obligations will inevitably lead to higher taxes and major reductions in entitlements and government spending. The nation will be less prepared to combat future recessionary pressures and less equipped to control inflation. Moreover, a weaker credit position will also create weakness in the dollar, further threatening our long term economic health.
Mounting U.S. debt and credit degradation could force a default on large portions of such debt; or in a worse case scenario could lead to a hyper-inflative printing of money not unlike that which occurred in 1920's Germany.
Unfortunately, most Americans fail to comprehend or recognize the potential damage that could occur from the continued fiscal irresponsibility of those in Washington. It is easy to turn to the government, but we all need to recognize that our government does not have an endless supply of money and that some short term pain may be necessary in order to maintain the long term economic health of the nation. Although not widely reported in the media, the information presented last January and this past Monday only provides strong support for the non-partisan CBO report that warned of the long term damage the Economic Recovery and Reinvestment Act posed.
J Brown
February 18th, 2008
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