The editors of the Wall Street Journal quote Fitch Ratings on their downgrade of the U. S. credit rating from AAA to AA+:
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions,†Fitch said in explaining its decision.
concluding:
The reason U.S. debt hasn’t been downgraded earlier and more often is because the dollar remains the world’s reserve currency. But that “exorbitant privilege,†as the French like to call it, is not a birthright. It can vanish in a flash if markets perceive a broader American decline in governance or its ability to meet its financial obligations.
This is where political leadership matters, and where it has failed. The White House criticized Fitch’s decision, but there’s a reason the downgrade happened on Mr. Biden’s watch. It’s a no-confidence vote in U.S. political leaders, and that starts at the top.
There’s a lot to criticize. I don’t think that the rating agencies should exist at all in their present form and they certainly shouldn’t be anointed as at present. That is a license to steal. Of course the administration will complain about it.
However, let’s go to the numbers. Consider:
and
I could draw the trend lines but I’ll just say what I see. The trend on federal tax receipts has either been flat or declined over a very long period (when you subtract the noise) while the trend on federal outlays has risen over almost as long a period.
Clearly, something gotta give. The U. S. credit rating is where that dichotomy is landing.
I have criticized every cut in the personal income taxes over the last 20 years. I don’t believe this is a partisan failing other than Republicans always want to cut taxes while Democrats always want to increase spending. As noted in comments recently nothing is likely to change until there’s a crisis.
Keep in mind Hemingway’s notable observation about how bankruptcy happens: gradually then suddenly. The worst time to attempt remediation is during a crisis. But it’s easier politically.
I’m reminded of Adam Smith’s quip, “there is a great deal of ruin in a nation”.
If one is waiting for a crisis, they could be waiting for a long time.
The observation is incentives all point one way. The federal government is incurring $1 trillion dollars per year in interest rate charges. Also, a lower interest rate should lead to higher inflation; that tends to lower the debt to GDP ratio.
A lower interest rate is in the purview of the Federal Reserve.
Countries can go on for a long time with higher inflation without crisis.
I think you can go on indefinitely as long as you are producing more and the increase in spending is below the increase in production. I haven’t even touched on my suspicion that our present way of measuring GDP is phony. Just to give a quick example, if you are educating fewer students less effectively but getting paid more for doing it, have you increased or decreased GDP? As it is calculated now, you’d be increasing GDP.
Whether or not Fitch et al. are doing a good job is an issue, but we do need an independent agent that can evaluate the quality of US debt. It sure looks like T bills are headed to junk status. That would be an economic disaster. Someone has to bring the US government to face reality.
The real problem is not Fitch, it is China, Japan, and other foreign holders of US debt. If they decide to dump treasuries, we are done.
That isn’t the business Fitch is in. Fitch is in the business of rating corporate creditworthiness. There are three such agencies: Moody’s, Fitch, and Standard & Poors. Since publicly traded companies are required by the SEC to be rated, only ratings from one of those three will suffice, and companies pay to be rated, there is a clear conflict of interest. To the extent that the CRAs rate sovereign debt and former SEC emloyees are hired by the CRAs, there is a clear risk of regulatory capture.
The entire system stinks to high heaven. There have been attempts to reform it, e.g. the Credit Rating Agency Reform Act of 2006 and Dodd-Frank, but the risks cannot be mitigated. The solution is to abolish the entire system. It’s inherently corrupt.
“Countries can go on for a long time with higher inflation without crisis.”
But people can’t. Depending on the composition of your index the past 2+ years have seen a loss in real purchasing power by wide swaths of the population of 15%+. Prices for energy and food, critically important, are still galloping along. Govt checks have all but run out. Credit cards are maxed, and at huge rates. Home equity has been tapped. And asset values have declined.
For many: “are you better off than you were 3 years ago?” No.
The ratings agencies are a sham. Captured. Not necessarily staffed by the best and brightest. Incompetent and corrupt indeed.
As for government debt. You still have the “safety” of government repayment. But you have no protection against the diminishment of value due to inflation or rising rates. (only the shortest of durations on the latter point)
“But you have no protection against the diminishment of value due to inflation or rising rates”
But the full faith and credit of the US Federal Government isn’t against the diminishment of value. Since 1971, (arguably since 1933), the US Federal Government has mostly promised to repay debt in norminal terms in an asset it can create unlimited amounts of. The only exception is TIPs and iBonds — which is why I expect there will be very little issuance of either type going forward.
This is why I think the bond downgrade doesn’t make sense. The Federal Government can’t have a credit event in the usual meaning that could apply to a person, a corporation, or even local governments.
“Something’s gotta give “
I first had that thought in 1985?, after the savings and loan bailout,
I thought runaway inflation was an imperative to handle the national debt, I thought $trillion/yr interest payments were unsustainable, I’ve been wrong all along I guess.
Now that I’m retired I have special interest in keeping inflation low but I admit after the stimulus spurt inflation has slowed.
If we live, we may see how things work out.