Moody’s warned that the U.S. government is in danger of losing its AAA credit rating. The Financial Times has a nice piece on it.
Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating,” the rating agency added in an issuer note.
Clearly, Moody’s-along with probably most of the American public-was not impressed with the recent budget proposal, which contains growing deficits for the next couple of years. After that, strong economic growth is forecast to reduce the deficits. What happens if we don’t have strong economic growth? No one wants to think about that.
Even the optimistic budget proposal show U.S. debt as a percentage of GDP growing to 77% by 2020, only a decade away. The 80% level is the level at which Kenneth Rogoff and Carmen Reinhart have noticed significant slowing in economic growth because of the debt burden. But it turns out, according to Moody’s, that we are already much closer to that number than we think.
Moody’s, however, says this understates the overall US debt level.
“Using the general government measure, including state and local governments as well as the federal government, which is used internationally, this ratio would be well over 100 per cent in 2020.”
In other words, due to an accounting convention, we don’t count debt like everyone else. This accounting fiction makes our debt burden relatively lighter on paper, but markets often figure out the real truth.
Markets are already punishing Greece and Portugal because of their debt burdens. If fiscal policy is not reined in, the U.S. could have some of the same problems down the road. Global markets always turn out to be more powerful than sovereign nations.
