Moody’s Warning On US Debt Rating Ignored By Congress

Moody’s says that plans by Congress and the Administration to extend tax cuts may stimulate the US economy for the next year. That will be the end of the positive effects.

The budget deficit and national debt will remain a problem, and reducing tax revenue will make the problem worse. Several deficit solution commissions, including the one created by the President, have already warned about the possibility that deficits will harm the Treasury’s ability  to raise money. None of those observations has derailed the new plan to “create growth” by way of low taxes. The growth creation theory depends on the assumption that individual and corporate taxpayers will put tax savings back into the economy. It is just as likely that corporations will use the new tax programs to build their balance sheets and that individuals will pay down debt or add to their savings.

From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth. Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years.

Moody’s, Fitch, and S&P have raised concerns about the ability of the US government to raise money at the current low interest rates that the Treasury enjoys. Recently, these rates have begun to move up. One theory about the reason for this increase is that global capital markets investors have already built the Moody’s warnings into their risk analysis of  US debt.

The Administration’s budget and CBO have distributed figures which presume that US borrowing cost will remain reasonable for the next decade. There are more signals that may not be true.

Douglas A. McIntyre