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  • Not Good

    Posted by David Foster on February 5th, 2010 (All posts by )

    Financial Times, 2/4:

    Moody’s Investors Service fired off a warning yesterday that the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tougher action was taken to tackle the country’s budget deficit.

    and

    Crucially, projections of the overall debt-to-GDP ratio for the US are seen as rising from 53 per cent in 2009 to 73 per cent in 2015 and 77 per cent by 2020. Moody’s, shopantibioticsonline however, says this understates the 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 percent in 2020.”

     

    5 Responses to “Not Good”

    1. Robert Schwartz Says:

      David: If you have the link to the FT article, we would appreciate it.

      The ratio is worse than stated in the quote above. Fannie Mae and Freddie Mac were not on the Federal budget, because, they were investor owned corporations. In summer 2008, they were placed in conservatorship by the Treasury, their non-government stockholders were wiped out, and Treasury has kept them alive with several hundred billion in cash. They should be on budget.

      If their obligations were added to the total debt, which should happen, it would add something like 5 T$ to the total, about 35% of GDP.

      We are so boned.

    2. david foster Says:

      Lex…just about everything at FT is behind a pay firewall…I never got signed up for on-line access so this citation is from the paper copy (yeah, I know, primitive)

      Slightly offsetting the understatements of debt that you reference, there may be some overstatements as well…to the extent that debt was incurred to loan money to banks that are actually going to pay it back in some finite time period, some of this might be temporary. But I’m pretty sure that the understatement elements of debt vastly outweigh the overstatement elements. (I doubt, for example, if the underfunding of state & local pension funds is fully recognized in the Moody’s analysis)

    3. david foster Says:

      A much more optimistic view here.

      While I agree with him that the ratings agencies have done an awful job and should not be given much credibility, I’m not very impressed with the rest of his analysis.

    4. veryretired Says:

      We are headed for a crash that will make 1929 look like a blip on the screen. The profligacy and ideological blindness of the ruling elites in the west is nearing a terminal phase.

      It is problematic whether or not the US could maintain its economic and military position in the world in the face of what will amount to national bankruptcy.

      The only consolation is that our major opponents are even more corrupt, vulnerable, and mismanaged than we are.

      I imagine, though, that that fact will be cold comfort indeed when the house of cards all the “experts” have constructed collapses in upon itself.

      Pardon my pessimism, but I am afraid the current regime appears to be Carter cubed, and I do not see any coherent, credible opposition which could muster the political and social strength to avert the implosion.

    5. Jonathan Says:

      I don’t think the linked Business Insider column is more optimistic. I think it merely points out the unreliability of the ratings agencies. They upgrade and downgrade national credit ratings based on dogmatic formulas. In the real world, the markets are far ahead of the agencies, and the agencies have a poor record of alerting investors and voters to risky situations in time for warnings to be useful.

      That said, it seems that we are headed for a major financial reckoning. Individuals have responded to the markets and their personal portfolio losses by deleveraging, but government remains levered up and in many cases is increasing its leverage, especially at the federal level. We might grow our way out of the debt as in the past, but at the same time that our national government is piling on new spending it is adamantly refusing to cut tax rates or otherwise improve incentives for economic growth. This situation is unsustainable, and the Obama administration acts like a national version of a municipal government that responds to complaints about profligate spending by threatening to cut police and fire service.

      If we are lucky, the markets or political intervention by the voters will force the federal government to change its behavior before there is a huge blowup.