U.S. Dealing with a Boatload of Debt - Moody's 26 comments
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Moody's is out with a note today addressing America's burgeoning debt load.
Some key excerpts:
The US government's financial position is projected to worsen considerably over the coming two years as a result of measures taken to aid the financial sector, the effects of the recession and the upcoming stimulus package.
At the end of fiscal year 2008, debt borrowed from creditors outside the federal government, the most relevant measure of federal government debt, amounted to $5.8 trillion, equivalent to 40.8% of US GDP. Compared with the central government debt of other Aaa-rated countries, this is a moderate level. However, total debt held by the public is projected to rise by more than half during the coming two years, reaching $9.0 trillion, or 62% of GDP by the end of fiscal year 2010. In the meantime, however, most other Aaa governments will see their debt metrics deteriorate as well.
Moody's also examines the ratio of this debt to the federal government's own revenue, which is a measure of the resources available at any moment to repay the debt.
At the end of fiscal year 2008, the ratio was 230%, quite high for a Aaa-rated country. Moreover, this is also forecast to rise steeply in the next two years, reaching 378% by the end of fiscal year 2010. The burden of the debt, measured as the ratio of interest paid to the government's revenue, is another important indicator. In fiscal year 2009, this ratio is projected at about 9.5%, also a high level among Aaa countries.
Whether in 2010 or after, interest rates are almost certain to rise from their current low levels and the affordability of the federal government debt will deteriorate.
A cautionary note:
Simply adding up liabilities does not provide a sound perspective on how burdensome the debt has become for the government, nor does it enlighten the debate about the strength of the US government balance sheet on a comparative basis.
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There is going to be no out right default. But there will be erosion of capital through debasement of the currency. Fear of that debasement will quickly turn it into a reality.
A Triple A rating has been a figment of Moody's imagination for sometime. It is only a matter of time before the only thing supporting the debt is the tax payer and those that are having their wealth eroded by inflation.
On Feb 05 03:21 PM Jason Lemire wrote:
> The US debt being denominated in US dollars, it will always remain
> triple A, as there is no risk of default. They can simply print money
> if ever their revenues are not sufficient to cover the interest on
> the debt.
>
> However, looking at it from a foreign owner's perspective, there
> is still no default risk, but the currency risk on the bonds should
> rise in parallel with the deterioration of the US government's budget.
> The Chinese and Japanese should be very worried about this, having
> a large portion of their foreign reserves in US debt...
>
> On Feb 05 02:56 PM Heaven, Hell or Hoboken wrote:
On Feb 05 02:50 PM plumstupid wrote:
> I've fallen and I can't get up!
In this case, the Fed becomes a real bank and repays the government, repays themselves for buying the notes at an interest rate, and then uses the notes to lend money putting reserve collateral with themselves to cover default. At which time if they fail they ask the Treasury for a loan to cover the expense which the treasury does by issuing more Treasury notes to the Fed to sell. A virtuous cycle this is not. Even a 3rd grader can see through this silliness.
To avoid this crockery, the Fed asked the government to allow banks to get paid putting money in the Federal Reserve so it can suck up tons of extra capital to buy tons of assets off banks etc. so they have money to buy the load of new Treasury Notes. But even this is failing so they are proposing allowing the Fed to be like the Treasury and issue its own Treasury like notes. Let's call them Federal Notes. That way the Fed can issue Federal Notes to pay the Treasury and the Treasury can issue Treasury Notes to pay the Fed. Ad infinitum...
The Weimar Republic would be proud. I'm gonna go buy a wheelbarrow to replace my wallet now.
And 9 out of 10 economists watched and said nothing as this whole Monetarist-Keynesian fraud fell on its face. I don't believe the idea that we borrowed our way out of the Great Depression is not supported by the facts. Ramping up for WWII with funds provided by the Allies, and the liquidation of malinvestments over a ten-year period, ended the depression.
> However, if the beginning of the great depression is any guide, now
> is NOT the time to rediscover fiscal conservativism. The good times
> were when we should have been running balanced budgets so we could
> be better prepared for times like this.
Chris B, you're (sadly) on-target. Discovering the wisdom of diet and exercise is a whole lot more effective before a heart attack than after . . . unfortunately, we can't go back in time and drop kick voodoo economics into the dumpster.
So what to do?
Outline a realistic, responsible policy that applies stimulus now, but in highly visible ways reduces outlays and increases income later. (Yup, we're going to end up paying higher taxes for less stuff . . . no way around it). Credit markets respond to future trends-- a highly visible and responsible financial plan could persuade the markets
A second point-- we should be financing as much of our debt long as possible. . . every 30 year bond that's sold has got to be better for taxpayers than 6 month or 1 year notes (because if interest rates rise to, say, %10, 2/3 or so of a %4 30 year bond's present value will be eliminated)
On Feb 05 09:54 PM JohnL wrote:
> And 9 out of 10 economists watched and said nothing as this whole
> Monetarist-Keynesian fraud fell on its face. I don't believe the
> idea that we borrowed our way out of the Great Depression is not
> supported by the facts. Ramping up for WWII with funds provided by
> the Allies, and the liquidation of malinvestments over a ten-year
> period, ended the depression.
Data on the history of US debt as a % of GDP can be found at
www.whitehouse.gov/omb...
(see table 7.1)
US Federal debt went from %52 of GDP in 1940 to %121 of GDP in 1946.
Despite what you seem to think, this was not financed by "funds provided by the Allies" -- what are you thinking? The UK was broke, and the Soviet Union wasn't buying Treasuries . . .both nations were buying a lot from the US, and had nothing much to sell; in the end, we ended up "lending" them quite a lot.
Lend-lease added up to $50 billion in 1940 dollars (GDP at the time was about $200 billion, so the loan -- which was effectively a gift, ended up being %25 of GDP. %25 of today's GDP would be $3 Trillion.
The coming period will require the testicular fortitude and foresight demonstrated by the likes of Chris, and Warren Buffet.
Join us! In 30 years we shall be known as the greatest generation.
On Feb 05 03:56 PM Chris B wrote:
> I hate the national debt and I hate paying 9.5% of my taxes to cover
> the INTEREST ONLY on debt that we built up in previous years just
> because we didn't want to pay higher taxes or cut spending at the
> time. We're get absolutely nothing in return for those billions
> in interest spending. Not more infrastructure, not better security,
> not better schools - nothing. The ROI on the Iraq war is negative.
> It's the price we pay for being selfish and irresponsible in previous
> years.
>
> However, if the beginning of the great depression is any guide, now
> is NOT the time to rediscover fiscal conservativism. The good times
> were when we should have been running balanced budgets so we could
> be better prepared for times like this.
>
> 9 out of 10 economists will tell you that cutting government spending
> in the middle of what was then a severe recession was a contributing
> factor in making it the great depression. It was only when the US
> took on unprecedented amounts of debt and put people to work building
> roads, bridges, tanks, and ships that the depression ended. The
> boatload of WWII debt was paid off after several years of subsequent
> economic growth boosted tax revenues (at the higher tax hikes that
> had been justified by WW2).
>
> The world has given us a once-in-a-lifetime gift; offering to loan
> the US government trillions of dollars at interest rates of less
> than 2%. If I could borrow money at those rates, I'd be in business
> because I could surely find a way to earn yields greater than that.
> Similarly, the US should be able to put this money to use to generate
> long term economic gains (infrastructure, technology, education,
> etc.) that will generate revenue above and beyond the cost of the
> loans - just as was done in the late 40's through the 60's.
>
> First, get us out of the depressionary spiral by investing in the
> future, then balance the budget when things get better, then reap
> the rewards.
>US Federal debt went from %52 of GDP in 1940 to %121 of GDP in >1946."
I don't think debt levels starting in 1940 are relevant to the early 1930s when the Keynesian stimulus was being applied.
> 9 out of 10 economists will tell you that cutting government spending
> in the middle of what was then a severe recession was a contributing
> factor in making it the great depression.
Government spending did not get cut during the beginning of the Great Depression. According to the White House document you referenced, it climbed dramatically from 1929 ($3.1B) through 1939 ($9.1B). The federal budget went from a surplus in 1929-30 to deficits starting in 1931 and every year after that. In 4 of the 5 years, 1932-36, the deficit was larger than all federal receipts! All of this deficit spending did not end the depression. The depression did not really start easing until 1939-41.
>Despite what you seem to think, this was not financed by "funds >provided by the Allies" -- what are you thinking? The UK was broke, >and the Soviet Union wasn't buying Treasuries . . .both nations were >buying a lot from the US, and had nothing much to sell; in the end, we >ended up "lending" them quite a lot.
>Lend-lease added up to $50 billion in 1940 dollars (GDP at the time >was about $200 billion, so the loan -- which was effectively a gift, ended >up being %25 of GDP. %25 of today's GDP would be $3 Trillion.
FDR began selling (not lending) war material to the allies in 1939 under the Cash and Carry law. Almost $4B of goods were sold to Britain alone in 1940. Meanwhile commodity and industrial prices began rising around the world due to preparations for the war (source BLS, Census Bureau, Forestry Service, Dept of Minerals Management) and trade started increasing at the same time. Lend-Lease did not start until 1941, after the recovery had already started.
So I respectfully continue to question this premise that borrowing and deficit spending ended the Great Depression. Despite massive stimulus, the 1930s were essentially a "lost decade" and I think it will happen again with all the crazy talk coming out of D.C. right now.
This is discussed in more detail in part of the following:
www.murdockglobalinsig.../
Our fiscal position is eroding rapidly. Any nation with a free floating currency that has ever defaulted went through the "just print money stage". America's blind spot is that most don't believe we could ever get to the point of default and so do not even try to steer clear of the conditions that have taken other nations over the edge.
On Feb 06 03:24 AM JohnL wrote:
>US Federal debt went from %52 of GDP in 1940 to %121 of GDP in >1946."
I don't think debt levels starting in 1940 are relevant to the early 1930s when the Keynesian stimulus was being applied.
----------------------...
The 1930s data does not support your thesis.
Federal deficits in the 1930s never exceeded %5.5 of GDP, and consequently didn't end the Depression. WW II _was_ the stimulus that ended the Depression. In 1930, under Herbert Hoover, the Budget actually ran a surplus, in 1938 the Budget ran a very small deficit (%0.1 of GDP); despite what is commonly imagined about the New Deal spending, it was actually fairly small, particularly so as defense spending was a much smaller part of US Budget than it is today.
All you have to do is read data to see that the it was the massive deficit spending associated with WW II that ended the Depression-- the New Deal was too small, and essentially was a "band aid".
To take but one measure: US GDP in 1930 was $97 Billion. The GDP fell to a nadir of $57 Billion in 1933 . . . and recovered slowly. US GDP did not achieve 1930 levels until 1940-41, and then rocketed ahead . . . powered by, you guessed it, massive Federal deficit spending, nearly all spent on war materials and infrastructure.
What wasn't it spent on? Consumption and housing. . . taxes were high, and with rationing in place, consumption was not part of the solution.
The difficulty in making that comparison is the quality of the debt. While the US has a zero or some would say a negative savings rate, Japan has and had a very high rate of savings even when their economic problems started in the 1980s.
While the Japanese population had a clear understanding of the problem, the US with its eternal naive optimism, or as others might conclude, complete failure of understanding the difference between vodoo economics and "Deficits don't matter" economic policy (there isn't any).
Is there a college or university in this country that teaches anything other than Keynesianism?
How short are memories are. Those who fail to understand our history are doomed to repeat it.
On Feb 05 03:21 PM Jason Lemire wrote:
> However, looking at it from a foreign owner's perspective, there
> is still no default risk, but the currency risk on the bonds should
> rise in parallel with the deterioration of the US government's budget.
> The Chinese and Japanese should be very worried about this, having
> a large portion of their foreign reserves in US debt...