Debt disaster dead ahead

When the credit rating agency Moody’s announced recently that the United States had moved “substantially” closer to losing its AAA bond rating, it largely ran as a wire brief, buried in newspaper business sections.


But this obscure announcement may one day be regarded as the beginning of the end of American prosperity.


Now, I know what you might be thinking: Moody’s was late on the subprime mortgage crisis, failing to lower ratings for companies with subprime-heavy portfolios until it was too late.


But, if anything, that should make everyone more nervous. If the bean-counters at Moody’s are starting to get anxious, things may be far worse than we imagine.


Regardless of past missteps, this credit rating agency still has serious influence among investors on Wall Street and around the world.


When companies and governments want to borrow money, they sell bonds. And when investors decide what bonds to buy, they turn to Moody’s and other ratings agencies for advice.


Bond ratings for nations are roughly analogous to FICO credit scores for individuals: The better your rating, the less you’ll pay for a home mortgage — or, in the case of the United States, an $800 billion stimulus package.


Today, the United States has an unblemished AAA credit rating and a reputation as the most reliable borrower in the world. So investors lend us money at low rates. Washington is paying about 3.3 percent interest on $12.5 trillion in outstanding loans.


The good news is that, at current rates, that’s relatively affordable.


Now for the bad news. (You knew it was coming, right?) On a debt as colossal as America's, even a modest rise in rates would be hugely expensive.


If, for example, Washington had to pay the same rate as, say, Australia, it would be shelling out an additional billion dollars in interest. Every day.


Consider this: if everything goes according to plan, in 2020 we will be spending “only” $916 billion on interest. But if, as Moody’s is warning, the United States were to lose its AAA rating, rates would rise and payments could double.


It is getting harder and harder to put a positive face on our financial situation. Even White House budget director Peter Orszag, who you’d hope would have some sort of plan for our fiscal future, recently said, “We’re on an utterly unsustainable path.”


There is only a small window of opportunity to solve this problem. Credit crises work on a positive feedback loop, where small problems snowball into big problems, and big problems snowball into catastrophes.


For some investors the new health care funding for an additional 30 million people may look like double-set-of-books accounting.


The financial markets are already reflecting the new state of affairs. Demand for Treasury securities sold at auction last week was so tepid that interest rates spiked to a level not seen since last June.


More troubling, the yield on some corporate bonds has actually dipped below the yield on their government equivalents.


Such an unusual reversal could mean investors have decided blue-chip corporations such as Berkshire Hathaway are less likely to default than Uncle Sam.


This is not good news.


By creating a new spending entitlement when Medicare is facing $38 trillion in unfunded liabilities, it is not a stretch to say the U.S. is nearing a precipice that has no precedent.


And not unlike going over a cliff, once the U.S. does it, other forces come into play, making it nearly impossible to reverse the fall.


Rick Berman is executive director of Defeat the Debt, a project of the Employment Policies Institute, a nonprofit research group studying public policy issues that affect the U.S. economy.



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