Monday, March 15, 2010

US Debt Rating Deteriorating

Moody's doesn't like what it sees.

The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

...Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report.

ObamaNomics: bankrupt the country...


Jeremy R. Shown said...

Are we going to have to rely on the bond market to put our fiscal house in order?

Man that's gonna hurt.

Billiam said...

Nothing but a total return to Constitutional government will repair the problem. As long as the entitlement mentality and corruption remain, it will only get worse.

J. Strupp said...

3.72% on the 10 year.....

...with those kinds of interest rates we had to go back to the olden days......of late 2008.

We should be borrowing more right now. The benefits by far outweigh the costs, given the current economic environment. At present, the U.S. debt market has experienced no significant stress both in short and long term rates. Auctions for short and long term treasuries remain strong. You can spin this anyway you want, but the data does not lie. Inflation expectations remain low.

Too low actually.

Jeremy R. Shown said...


I would agree that we should be borrowing more right now if it was just a one or two time event in response to the economic crisis. Even if it was several trillions.

But the President's budget proposal has a deficit of 5.6% of GDP in 2020! What's the plan for that? Hope rates are still low ten years from now? Seems like a terrible way to run a country.

Dad29 said...

We should be borrowing more right now.

Spoken like a man without children--just like Keynes.

You pay it off, Strupp, and I'll be happy to borrow billions, too!!

J. Strupp said...


Fix health care. Fix social security. I'm not advocating Obamacare by saying that. I'm only saying that our long term debt burden is caused by those two problems. As you say, short term borrowing in response to the economic crisis is what I strongly advocate right now. The cost of servicing our debt right now is CHEAP. Pull demand forward. Get people back to work. Give the private sector time to deleverage. You know the argument. My guess is that we agree on more than we disagree on this subject.

Secondly, paying down the national debt is not really necessary in the long run. I know that sounds crazy but it's not. Stabilizing debt/GDP is the important thing. We can run very large deficits indefinately as long as we stabilize debt/GDP. While this kind of thing makes Dadster's head explode, stabilization can keep inflation excpetations in check and interest rates relatively low. Obviously, this is easier said than done but it's more rational than paying down the debt during a time period of high unemployment and huge slack in output which seems to be the problem over the next 5-10 years.

J. Strupp said...

Dadster, I have 2 kids.

Let me try this one more time:

No one, especially Keynesians, advocate massive government spending in any time period other than when the fund funds rate is up against the zero bound, unemployment is high and private investment has collapsed. Why oh why must this be clarified to every conservative on planet Earth over and over and over. We are in basic agreement in terms of the long term deficit issues this country must address at some point in the near future. THIS has nothing to do with our current economic crisis and how we should address it. Short term stimulus spending will NOT crowd out private investment. Short stimulus spending will NOT raise interest rates. Short term stimulus spending WILL be effective in boosting demand. Short term stimulus spending WILL lower unemployment, create multipliers which WILL further reduce unemployment. Deficit spending in any other time period other than in a liquidity trap WILL do the very opposite of what I just mentioned.

Dad29 said...

Struppster, I have agreed with you that SOME Gummint spending is a good thing--e.g., DofD hardware, GSA automobile purchases (and other hardware purchases), etc. IOW, spending through private industry.

I'll even concede that roadbuilding is a good thing in the same context.

But I cannot agree with you that "stabilizing" the USDebt is the smart play. I'd rather see it brought to zero, or VERY low compared to GDP--so that there's room to borrow for the NEXT recession.

It is imperative that the US adopt a Ryan plan (or similar) for long-term spending reduction in order to achieve debt-reduction.

Obama's budget is simply wrong from start to finish (exculpting stimulus on which we agree.)

J. Strupp said...

Regarding the USDebt. Fair enough. Just keep in mind that the U.S. treasury market is (as has always been) an extremely important asset for the global debt market. Eliminating our debt would eliminate a major risk-free instrument that would come with consequences in the global economy. I'm all for debt reduction, just not debt elimination. The point is probably mute anyway. I can't picture a world where this scenario plays out.

Regarding Ryan: Unfortunately, Ryan's Roadmap ends up costing this country a truckload of money over the long run because he basically slices tax revenues to close to 16% GDP which would be a disaster in terms of our long-term fiscal woes. The make-up of the tax cut distribution looks familiar too. Rich folks should be lining up to donate to this guy for sure:

I like Ryan. I really do. He's a very smart, articulate guy who has the country's interest in mind. No question. I just think he should stick to his strong suit and assist in health care reform because his tax reform plan is a complete and utter nightmare.

Dad29 said...

For a guy who likes "pump-priming" as much as you do, you sure like "Pump-drying"--taking money from those who CAN spend/invest..

The critique, by the way, doesn't take into account Ryan's spending reductions. Agreed, you have to get pretty far out there--40-50 years--to see the effects, but they come in eventually and reduce the debt.

It's the "least-pain" method. As you say, Ryan's got the country's interests at heart.

As to UST's and carrying-cash, we agree. But making the US debt-free will take (per above) around 50 years, and the US will NEVER stop issuing short-term bills.

J. Strupp said...

"The critique, by the way, doesn't take into account Ryan's spending reductions."

O.K. But then why was the CBO told by the Ryan people to assume revenues of 19%/GDP when scoring his “Roadmap”? And why did Ryan object so strongly to CBPP's analysis of his proposal, which says his proposal is only generating tax revenues of 16%/GDP?

....Hey I don't object to rich folks getting a fair deal. But if you look and corporate and top marginal tax rates in this country over the last 100 years, I think it's safe to say that these people are getting a bit more than a "fair" deal by paying 35% tax rates versus, say, twice that percentage 30 years ago. The economic impact of, say, 38% versus 35% tax rates (once the economy is back on it's feet obviously) will be negligable. It will, however, increase tax revenues. If you raise rates back to, say 70%, than that's a whole different ballgame. 3%? Eh, not so much (in a healthy economy). Do top marginal rate tax cuts create jobs? Well sure they do. But the impact is much less pronounced these days than most pundits want you to believe.

Top tier real wage growth has exploded in the last last 10 years while the middle class has experienced real wage growth that's flat or falling. That's not a whole lot of trickling down I'm afraid. This scenario definately was the case when Reagan and Kennedy cut tax rates from 90% to 70% or 70% to 40% respectively but recent tax cuts just create more deficits and income concentration at the top of the food chain. The past 8 years has been a good case study of that.

Dad29 said...

That 'middle class' stagnation has been a direct result of labor arbitrage in manufacturing (read: PRC) and info tech (read: India.)

THAT is a result of Executive and Congressional policies which have been in effect (greater/lesser degree) since GHWBush. Clinton did NOTHING to prevent it, albeit the Bushes were far worse.

On the other hand, much of that arbitrage was driven by exorbitant union contracts, principally in auto/off-road mobile equipment manufacture. I say "exorbitant" because that's what it is.

I'll concur with you that a 38% top taxrate is livable--so long as OASDI and Medicare/Medicaid don't also jump, nor State tax rates.

Then YOUR job is to get the UAW to wake up and smell the coffee.

neomom said...

Don't forget all the "other" taxes - sales, property, phone/TV, yadda yadda. Just for giggles sometime add up all the taxes you pay in addition to your income and payroll taxes. I did... Our little middle class family of four is at a total rate of 47%.

I think the government is getting enough. Time for some budget cutting.

Moody's agrees.

Jeremy R. Shown said...


Good thread. I've enjoyed the back and forth.

But I think my original comment still holds true.

If the bond market, rather than our elected leaders, is the one to eventually "fix healthcare" or get the debt to gdp ratio right, it's gonna hurt.

J. Strupp said...

"Then YOUR job is to get the UAW to wake up and smell the coffee."

I'll pass Dadster. You'll have to find someone else to hold water for the UAW.

Jeremy, no doubt about it. We all agree on that.