Ken Hasset: The United States debt should be downgraded today

As debt to GDP goes up, the cost of defending our sacrosanct AAA status with the agencies is becoming untenable.  I have argued before that based upon our current strategy of extend and pretend, our debt and unfunded liabilities give the US an incredibly weak balance sheet. 

Forget the fact that one Chinese credit rating agency, Dagong Credit, has already taken the US off the AAA pedestal.  Via Bloomberg:

If you look at the U.S. budget trajectory with an eye on the lessons from Japan’s recent history, there’s a strong case that the U.S. rating should be cut immediately.

It’s true that the U.S., with total government debt equal to 98.5 percent of gross domestic product, according to Organization for Economic Cooperation and Development data, has many years of unrestrained deficits ahead before it reaches the crisis point of Japan, which has debt of 204 percent of GDP.

A more plausible target, however, is 135.4 percent of GDP. That was Japan’s debt in 2000, just before S&P first downgraded it from AAA in February 2001.
I would argue that using Japan as a reference point is misguided.  While Japan does have huge liabilities in debt and unfunded liabilities, it has a strong asset side of its balance sheet as it is the worlds largest creditor nation. 

Also, it owes its money primarily to the Japanese public.  So while the US owes its money to the Chinese, Japanese and British, the Japanese owe most to individual pensioners and other Japanese investors.  So when the US pays money back to Japan, it largely gets tranferred to the Japanese public. 

Since the US owes its money to external creditors, it does not have that luxury.  As the US continues to run up deficits it will be forced to forego future spending.  If that is not politically possible, then we risk default. 
If the U.S. makes no fiscal progress, and continues to run annual deficits at the 2011 level of $1.48 trillion dollars, it will take just six years to reach a debt level of 135.3 percent of GDP. The Japan precedent suggests the U.S. would lose its sacrosanct AAA rating at that point, if not sooner.

To be fair, the Congressional Budget Office, in its forecasting, predicts that the U.S. will do better than that, in part because revenue should increase as the economy recovers.

However, since spending is controlled at the level of Congress, it doesn't give me hope for reducing spending, especially since Obama's SOTU message was one of increased "investment", read spending, on all his pet green projects.   This makes reducing spending very difficult, especially given that he can always veto any budget sent across.
CBO’s wholly unrealistic baseline forecast suggests the day of reckoning is far off. Don’t believe it.

The U.S. could depart from the collision course with a downgrade if it took serious steps to reduce its deficit. But President Barack Obama’s State of the Union address offered pitifully small spending cuts while floating Obama’s fiscal commission out to sea on an iceberg.

I may be old-fashioned, but all of this should mean that rating of U.S. long-term debt should be downgraded -- today.


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