02.28.2010 0

Moody’s Warns U.S. Sinking into Financial Abyss

  • On: 03/16/2010 10:03:33
  • In: Fiscal Responsibility
  • By Bill Wilson

    “A national debt, if it is not excessive, will be to us a national blessing.”—Alexander Hamilton.

    Not even Alexander Hamilton would support today’s national debt.

    When the nation’s system of perpetual, permanent debt was enacted, it provided, according to American Public University’s History Central, “that the debt be funded by reissuing bonds to be paid back in full after 15 or 20 years. Thus, rather than eliminating the debt, Hamilton’s plan created a large, permanent public debt, issuing new bonds as old ones were paid off. Congress approved this proposal.”

    More or less, that’s the system that still exists today. Paying off the principal on the national debt is done almost entirely by the issuance of new Treasury bonds. And, per Hamilton, “if it is not excessive,” can be indispensable — in times of war, for example.

    For now, the nation is able to sell new bonds to pay off the old. Since the national debt has grown every single year since 1958, however, that means annually, for more than 50 years, more bonds have been sold than have been paid back. This has thus resulted in a net increase of the debt every year, even when Congress supposedly “balanced” the budgets in 1969 in and in 1998.

    Interest servicing the debt, on the other hand, comes out of revenue. This is where it gets interesting — and downright scary.

    The U.S. is about to max out its credit card while barely keeping up with its minimum payments servicing the nation’s gargantuan $12.4 trillion mountain of debt. Yesterday, Moody’s Investors Service again warned the U.S. that it is “substantially” closer to having its credit downgraded.

    As reported by Fortune’s Chris Barr, “interest payments on general government debt — combining the federal government with the states — could rise above 10% of revenue by 2013… That’s the level at which the rating agency typically considers a downgrade. Moody’s said debt affordability is the key factor to consider in ratings decisions, because debt costs are apt to constrain policymakers…”

    This is a critical point. Why? As reported by Bloomberg’s Matthew Brown, “Financing costs above 10 percent put countries outside of the AAA category into a so-called debt reversibility band, the size of which depends on the ability and willingness of nations to reduce their debt burden by raising taxes or reducing spending. The U.S. has a 4 percentage-point band…”

    That does not leave that much wiggle room — at all. Barack Obama and Congress are pushing the maximum limits of the full faith and credit of the nation, violating Hamilton’s admonition of an excessive national debt burden. By 2013, according to the White House, the debt will top 100 percent of the Gross Domestic Product.

    Just how bad is this scenario? Per Brown, just 0.5 percent less economic growth, higher-than-expected interest rates, and “less fiscal adjustment” each year below Moody’s projected baseline assumptions would result in the U.S. “paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said.”

    Making matters even worse, the Congressional Budget Office (CBO) estimates that interest as a percent of revenue will top 14.8 percent as soon as 2015. That year, $520 billion interest will be owed with a projected $3.504 trillion in revenue, according to the CBO. By 2020, that number rises to 20.7 percent: $916 billion owed with projected revenue equally $4.417.

    For our uninitiated readers, that’s bad. Really, really bad. Within five short years, the nation will rocket past the 14 percent interest-owed-to-revenue credit limit imposed by Moody’s. And that’s assuming that U.S. treasuries sell splendidly. That there is no run on the dollar.

    But, by the government’s own data and Moody’s stated warning, a debt downgrade now appears all but certain. This is an emergency, but it is not being treated as such.

    Treasury Secretary Timothy Geithner promised to the American people that this would not happen. He said a debt downgrade “will never happen to this country.” Really? Was that an accurate assessment of the increasing risk of sovereign debt default in the U.S.?

    Surely he must have known what the criteria for keeping the nation’s Triple-A credit rating was. If he didn’t, he should be fired. If he did know, he lied, and should be subpoenaed. And fired.

    All this time, the nation has been sold a bill of goods that deficit-spending and monetary easing were absolutely necessary to “save” the economy. But now that Congress, the Treasury, and the Federal Reserve have done so, the risk of sovereign default looms ever-closer. What has been gained exactly?

    A debt downgrade would almost certainly mean higher interest rates, higher tax rates, and an overall weaker economy. In turn, there would be less jobs and, since the nation depends on both individual and corporate income taxes, that will mean less revenue.

    All of which will further deteriorate the American people’s ability to keep up with servicing the debt.

    In other words, the slightest economic hiccup — in commercial real estate, basic housing, education, energy, or elsewhere — could result in the nation’s finances being devastated almost immediately.

    Even worse, if the Obama budgets are enacted as proposed, within five years, the nation’s finances will be devastated, per the CBO’s data and Moody’s warning.

    Think the CBO is exaggerating? By the White House’s own projections, the percentage of interest-owed-to-debt will top 14.7 percent, not in 2015, as the CBO projects. But in 2014, a full year sooner. That year, according to the Office of Management and Budget, interest owed will total $510 billion versus $3.455 trillion.

    Juxtapose Moody’s warning yesterday with reports that the Social Security Administration (SSA) has now begun cashing in its $2.5 trillion in treasuries.

    As reported by the AP’s Stephen Ohlemacher, “For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year. Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.”

    Making matters worse, as Social Security cashes in its treasuries, the only way for the government to pay for them will be to… issue more treasuries! That would mean that another $2.5 trillion would be piled atop the national debt.

    These IOU’s have been piling up for years, and now that the Social Security is finally in the red, the SSA is cashing them in to keep the payments moving. However, by 2037, if not sooner, it is projected that the Social Security will run out of those IOU’s. It will be completely bankrupt.

    For now, the nation is able to pay off the principal owed on the debt through the sale of more treasuries. But because that debt is now so excessive, government entitlement programs are now in the red, and credit rating agencies are already firing warning shots across the nation’s bow, it is now much riskier. Markets will now begin demanding higher yields on that debt.

    Hamilton may have supported the creation of a perpetual debt, but nowhere did he ever propose, as a matter of policy, that the nation contract debt far beyond the nation’s ability to pay for it. This is beyond excessive.

    This is suicidal. That sinking sound you hear is the Ship of State being fully plunged into the bottomless Abyss.

    Bill Wilson is the President of Americans for Limited Government.

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