Moody's Opinion On "Evolution" Of US Aaa Rating

There was more bad news about the view credit rating agencies have on the debt of large developed nations. Moody’s released a new Special Comment entitled “Evolution of Moody’s Perspective on the US Aaa Rating.” The message was simple. America’s debt is too high and is growing too fast. There is nothing about the GDP forecast and the unemployment rate in the US that will allow it to “grow” out of the deficit problem. Government costs continue to rise. Government receipts may barely do so.

Moody’s characterized the present threat to America’s Aaa rating as small. Japan may have thought its sovereign rating was solid as well. S&P disapproved of the notion and dropped its rating from AA to AA-. The capital markets reacted badly. Without a Herculean effort to cut costs, Japan may not recover its financial footing for a decade. That happened during the end of the last century, so there is recent precedent for national debt problems in Japan.

There really is not a precedent for the current debt and deficit trouble in the US. The deep recession, the need for stimulus, and a collapse of the increase of government tax receipts collided to take the American budget deficit to nearly $1.4 trillion last year. The CBO reports that number could be closer to $1.5 trillion this year. The cuts that the Administration plans to make to defense and discretionary spending are modest. Even the Republican plans to strip $100 billion out of the federal budget will not solve the deficit problem

The US is doomed to suffer a downgrade in its debt before its begins the hard work on restructuring Social Security, Medicare and Medicaid. A downgrade may not even be enough of a shock to bring Americans to their senses. They have paid for their entitlements and they believe they deserve them.

There is nothing novel about the idea that a credit downgrade may be the catalyst for a move to austerity, not on the scale of Ireland or Greece, but on par with anything the US has had to do in a number of decades. Austerity, unfortunately, will have to be forced on America. It cannot, or perhaps will not, read the writing on the wall.

Douglas A. McIntyre