The good news, according to Moody’s, is that the U.S. government will spend about 7% of its total revenue in 2010 servicing the huge U.S. debt. That will rise to 11% of total revenue in 2013.
That’s the good news?
Well, sure. Moody’s, one of the three major debt rating companies in the United States, says that if the economy grows 0.5 percentage points more slowly than its baseline forecast of moderate growth, if the government doesn’t cut spending as much as it now thinks likely, and if interest rates climb faster than expected U.S. spending on debt service (that’s the interest the government pays on its debt) could climb to 15% of government revenue.
And that would be bad news indeed because it would probably cost the United States its AAA credit rating. And that would push U.S. interest rates yet higher and economic growth lower.
Here’s how Moody’s will do the math to determine if the United States should lose its AAA rating.
If an AAA-rated country spends more than 10% of its revenue on servicing its debt, Moody’s doesn’t downgrade it immediately. The country gets a bit of time to get its fiscal act together. That time amounts to what Moody’s calls a “debt reversibility band.” The size of that band depends on Moody’s assessment of how willing and likely a country is to reduce the size of its debt. For the United States Moody’s has set a 4 percentage point band.
Which is why the possibility that lower growth, fewer spending cuts, and higher interest rates could push debt service about 15% of total revenue is so scary.
Last time I did the math 15% was more than 10% plus 4%. And that would probably earn the United States a downgrade from AAA.
The United States doesn’t have to start cutting spending immediately. That’s fortunate because immediate spending cuts could stall this still very fragile recovery.
But the window isn’t very large—less than three years—and it gets narrower every day.
Skipping Moody’s/S&P’s big misses regarding the extent of financial problems (in countries or companies), it still all remains relative — by the time the US is downgraded, everyone else will have been too. So, demand for the US dollar will likely stay strong (maybe the ratings agencies’ criteria will change and everyone will be “rescued” and have ratings upgrades…)
The only thing that frustrates me about the “know-it-all” posters is when they carry on conversations in article threads that have NOTHING TO DO with the subject Jim is discussing in his post. Take the off topic conversations somewhere else and toot your horns in your own blogs.
but while Moody’s rates everyone – who rates Moody’s ?
.. I’d give Moody’s an F- rating.
Greece has a 12% budget deficit and deservedly an A- rating.
But the US debt is well over 15% !!!!!
It’s officially about 11% of GDP but then there’s also the “off balance sheet” debts from the Iraq and Afghanistan war plus the health liabilities.
The US is cooking more than the books- they are also frying Moody’s brains.
While I don’t want to get involved in flame wars, I just want to add that I have appreciated the vast majority of posts by the regulars such as EdMcGon and Seaturtlelady. If you don’t like someone’s posts, skip them . . . others of us might find them of value (or at least amusing).
The worse thing that can happen to a forum is when people begin flaming others. I don’t understand why some recent posters are having such a personal issue with specific people. The greatest strength of the Internet is the freedom of speech and the ability to access an incredible range of diverse topics.
Dear Jim…
Is this or is it not a site for any and every one of us to post freely whether we’re veterans to investing or newbies? I want to learn and have the freedom to ask questions or even post my opinion at some point. However, the negative comments made above were totally unjustified!
I would be disheartened if we lost posters like EdMcGon and others on a certain list that ntack5 is keeping up with. How much effort does it take to SCROLL through the dribble and irrelevant opinions?!
At this point, I would be very happy to utilize a “side” blog so the “know it all’s” won’t feel compelled to make us “wannabes” less than inferior! Perhaps just an exchange of email addresses might satisfy both parties??
Can we agree to 1 post per week each, no more than 5 sentences? I’m keeping a list with certain names now and just skipping their dribble.
Jim:
Your insight and analysis are first-rate and your writing style is eminently understandable and a pleasure to read. Your selfless sharing of information is greatly appreciated.
I have one suggestion, however. It is tedious and time-consuming to have to read through McGon’s repeated and tiresome efforts to demonstrate how clever he is, and his equally dubious attempts at humor, as well as frequent off-topic comments and questions by some other readers.
Perhaps you set set up a separate link for all comments that do not pertain to your preceding blog in any meaningful or intelligent manner so that those of us who wish only to view relevant opinions will have the opportunity to do so, without having to wade through the irrelevant ones.
Thanks, again, for being you.
Isn’t Moodys the guys who rated the MBS derivatives (that were insured by the companies who did not have the reserves to cover them if they went bad) as AAA. We all know how that went. Now they are saying that the US debt is not AAA. By comparison things must be really bad.
Social Security is now asking Treasury to pay back some of those IOU’s. The time may be closer than we think.
McGon- Take a break, please. You’re not interesting, your not funny, you’re not even right.
Makes you curious how Paul Krugman sleeps at night.
In my humble opinion I think Jim is already on the path of what you do when U.S. loses it’s AAA rating, and that is invest more in other countries.
ajl203psu:
Great point! That’s why Moody’s and S&P have been reluctant.
Jim,
I think we should be prepared that the US will loose their AAA rating some time in the future, just because nothing is done in this country to avoid this to happen.
How should it affect my investment strategy? Brazil does not have AAA rating, and their stock market is bumpy, but is doing pretty well.
I can almost see it now. Moody’s cuts the U.S. AAA rating and then the U.S. fines Moody’s for its role in the subprime ratings debacle.
we’ll figure out a way to cheat out way through it like always. cook the books!
In other news, the U.S. Mint is changing our coins. They will no longer read “E Pluribus Unum”. From now on, they will read “Stuck on Stupid”…