As the Obama administration and the Federal Reserve desperately try to restore the economy to its debt-fueled status quo, relying on deficit spending and Fed balance sheet expansion to goose the economy, they are playing a game of chicken with credit rating agencies that could leave the American economy scattered in pieces all over the road to nowhere down which we’ve been headed for decades.
As reported in the first of these articles, Moody’s Investor Services has once again warned the U.S. (along with Britain) that its soaring national debt may lead to loss of its triple-A credit rating. Such a downgrade would have serious consequences for America’s ability to raise cash to finance its deficit spending.
The United States and Britain must take action soon to get their public finances in order if they want to avoid threats to their top triple-A credit ratings, a leading credit ratings agency said Tuesday, accelerating U.S. and European stock markets’ decline. In an assessment of eight triple-A countries, Moody’s Investors Services said the public finances in both countries are deteriorating considerably and may therefore “test the Aaa boundaries” in the future.
Moody’s has essentially put the U.S. on notice that it has perhaps only a year or so to get its act together or risk a down-grade:
“Next year, Aaa governments with stretched balance sheets will find themselves under pressure to announce credible fiscal plans and, if markets start losing patience, to start implementing them,” he (Pierre Cailleteau, managing director of Moody’s sovereign risk group and lead author of the report) said.
None of this is new, of course. The ratings agencies have been blustering about this for some time. But this time, at the same time, comes evidence that they’re getting serious.
Ratings agency Fitch has cut Greece’s debt rating, sending markets in Greece into turmoil:
Ratings agency Fitch cut Greece’s debt to BBB+ on Tuesday with a negative outlook, the latest blow to the troubled euro zone country, driving its bonds, bank shares and the euro itself lower.The cut was the first time in 10 years a major ratings agency has dropped Greece below an A grade. Fitch cited fiscal deterioration in one of the 16-member currency bloc’s most indebted member states.
Listen to what Fitch has to say about Greece and tell me it doesn’t sound like they’re talking about the U.S.:
“The lack of substantive structural policy measures reduces confidence that medium term consolidation efforts will be aggressive enough to ensure public debt ratios are stabilised and then reduced over the next three to five years,” it said.
… Greece’s socialist government, elected in October, has revealed the budget deficit was twice as big as previously reported and has pledged to bring it under 10 percent next year.
Debt would soar to more than 120 percent of GDP in 2010, it said.
Analysts said Fitch’s cut would add pressure for the government to take yet more drastic measures and expected more downgrades to follow.
In the terms defined above, the U.S. budget deficit and national debt aren’t terribly different than Greece’s. And what’s driving Greece’s financial problems? Their trade deficit. Among the 31 developed nations of the world (those with per capita purchasing power parity above $25,000 per year), Greece ranks dead last in terms of its per capita trade balance with a deficit of $6,032 per person. Where is the U.S. on that list? We’re 28th on the list, with a deficit of $2,734 per person. (See https://petemurphy.files.wordpress.com/2009/11/trade-balance-per-capita-ppp-gt-25k.pdf)
Congress is in the process of drafting financial reform regulation, and among those proposed reforms is a crack-down on credit rating agencies who played a big role in the global economic collapse by awarding unrealistic credit ratings to securities backed by risky sub-prime loans. The rating agencies have gotten the message, so the U.S. can no longer expect that its own debt will continue to get high ratings with a wink and a nod.
If the U.S. wants to avoid the economic disaster that would accompany a falling credit rating, it’s got to get serious about reducing its trade deficit. The time for incessant talk with our trading “partners” is past. It’s time to take matters into our own hands and finally do what’s necessary to assure a balance of trade – impose tariffs on manufactured goods from overpopulated nations.