By Robert Romano – In a recent column for the Wall Street Journal, Holman Jenkins criticized rating agencies for threatening to downgrade the United States’ Triple-A credit rating because, he writes, “the debt to bondholders will be the last to be dishonored.” As such, the U.S. is nowhere near default.
That may be so — for now. But the reason the U.S. is threatened with a downgrade is not because of any imminent default, as if the only two categories of ratings were “uber-dependable” and “low life slacker”.
Rather, we’re in the hot seat because the national debt is on a fiscally unsustainable trajectory. S&P worries about the rising debt-to-GDP levels. Moody’s worries about interest payments becoming an ever-larger share of revenue.
More or less, the debt is growing so fast that if not reined in will indeed hinder our ability to repay on time and in full. By 2021, annual interest owed on the debt will likely rise to $1.3 trillion as interest rates normalize and the debt rises to $26 trillion.
Don’t kill the messenger. The agencies are just noting in a technical fashion what the American people know intuitively: We spend far more than we take in.
So, if the Washington establishment does not want to be considered a profligate credit junkie by the agencies, there’s a simple solution: Stop spending so much.
Jenkins suggests the rating agencies have now stepped out of line by threatening a downgrade. Why? Ironically, he writes, because over $4.5 trillion of the national debt need not be paid back.
According to Jenkins, “There’s a reason the monumental unfunded liabilities of Social Security and Medicare are not counted as part of the federal debt — they don’t have to be paid.”
For the uninitiated, Jenkins is referring to the Social Security and Medicare trust funds. Surplus monies that flowed into the system via tax revenues have been lent to the federal government to spend on other things. Now Uncle Sam owes the trust funds over $4.5 trillion. It is debt owed to the public.
In that sense, the American people are the largest creditor of the national debt of all, more than even the Federal Reserve or China.
But according to Jenkins, we should not be downgraded or considered on a fiscally unsustainable path because that portion of the debt — over 30 percent of the debt — need not be repaid. Jenkins is actually proposing a default in the same breath he is assuring bondholders and the credit raters that the nation will honor its obligations.
Of course, the obligations to Medicare and Social Security are being paid. And most likely, they will continue to be paid until the trust funds run out in 2024 and 2036. At that point, the Treasury debt currently held by the trust funds will have been rolled over into so-called “public” debt. The only way those bills won’t be paid is if we default on the trust fund obligations — during a period when the Baby Boomers are in retirement.
The politicians in Washington cannot even bring themselves to contemplate any big spending cuts. The 2011 CR deal only cut outlays by $352 million. And the House bill now proposed to raise the debt ceiling would cut the FY 2012 deficit by $22 billion, but has been declared dead on arrival in the Senate.
Yet, we are to believe that the most sacred obligations on the federal ledger, the entitlements, are the ones we will default on first?
Moreover, we are also to believe that the American people, credit raters, and politicians are apparently supposed to ignore the $4.595 trillion of debt in Intergovernmental Holdings (which includes the trust funds), and the over $200 billion in annual interest we are paying into those accounts (which requires more borrowing publicly), because they might not be paid?
For that matter, why count the debt held by the public at all? That might not be paid either.
This accounting gimmickry allows politicians to claim that the debt to GDP is only 65 percent when in fact it is 95 percent. It allows over $200 billion in interest payments to be ignored as a real liability even though it requires real borrowing publicly to honor those payments. If one recalls, the Greek debt crisis began as an accounting scandal, where the government had lied about billions of off-balance sheet liabilities.
Sovereigns around the world are required to play by a far different set of rules. The issue with the rating agencies is whether they will hold the U.S. to those rules as well.
Will we wait until the trust funds expire before we suddenly notice that the debt is far larger than the economy? Or that interest payments have suddenly risen to untenable levels?
Ignoring the trust fund debt as an accounting matter — which is already being paid — is like ignoring a malignant tumor.
Robert Romano is the Senior Editor of Americans for Limited Government.
