Downgrading America

As the clock to debt-ceiling doomsday ticks down, politicians from both parties have begun to fret about the impact of the U.S. budget crisis on domestic and global stock markets.  House Speaker John Boehner wanted a budget deal over the weekend to avoid panic when the markets opened on Monday.  (Not much evidence of panic just yet, as it happens.)

Of course, everyone is concerned about the threat to America’s credit rating, advanced by both Standard & Poor’s and Moody’s.  If our credit rating drops, it will make bond purchasers nervous, and raise the cost of servicing our titanic national debt. 

The two parties draw different conclusions from this threat.  Democrats think it means we should raise the debt ceiling immediately, because the credit agencies are worried that the United States will default on its financial obligations.  Republicans say the size of the national debt is more of a problem, and point out that the President is constitutionally required to pay debt interest, so default shouldn’t even be a topic of discussion.  Of course, given the way the Constitution is treated these days, you can’t really blame the credit agencies for seeing it as something less than an ironclad guarantee of payment.

Maybe we could make some progress toward settling this argument by looking at the credit agencies that have already downgraded the credit rating of the United States.

Ben Baden at U.S. News points out that while the media generally only pays attention to the Big Three – S&P, Moody’s, and Fitch – several smaller agencies have already reduced their ratings.  All three of the agencies Baden describes cited our massive level of debt, and skepticism that the U.S. government can ever control its spendthrift ways, as reasons for their actions.

For example, the Egan-Jones Ratings Company, which enjoys the same level of recognition from the Securities and Exchange Commission as S&P or Moody’s, lowered its rating of U.S. debt from AAA to AA+ two weeks ago.  Isn’t it strange that didn’t make headlines, given the prestige of this operation?  Maybe it’s because of the reason Egan-Jones gave for its action:

The major factor driving credit quality is the relatively high level of debt and the difficulty in significantly cutting spending. We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100 percent compared to Canada’s 35 percent.

Wow.  That’s not very helpful to the Democrat Party, is it?  In fact, it pretty much refutes their entire argument for raising the debt ceiling and demanding fresh tax increases.  I can see why the big networks wouldn’t want to talk about it.

Weiss Ratings of Jupiter, Florida is even harder on Uncle Sam.  They already had the U.S. government at a “fair” rating of “C.”  Do you remember coming home from school with a “C” on your report card, and trying to tell your parents it meant “fair?”  How did that work for you?

At any rate, Weiss knocked the United States down to C-minus last week, which Baden tells us is “the Standard & Poor’s equivalent of one notch above ‘junk’ status.”  That’s just wonderful.  And why did Weiss show our government the back of its hand?  Was it because they were nervous about the debt ceiling crisis created by intransigent Republicans who refused to give our glorious President the “clean” debt increase he demanded?  No, and they explicitly said so.

Our downgrade today is not contingent on the outcome of the debt ceiling debate in Washington. It is driven exclusively by the numbers, which indicate that, in addition to a decline in the long-standing weaknesses we noted three months ago, the U.S. has already lost the golden halo that helped guarantee liquidity and acceptance of its government securities in global markets.

The third black mark Baden talks about is from a Chinese agency, Dagong Global Credit Rating.  They fret about “the slowdown of growth, the high financial deficits, and rising debt dependency,” which jeopardize America’s “actual ability and intention to repay its debts.”  America buys most of its debt from itself (yes, that’s as insane as it sounds) but China is, as you might recall, a major customer.  It’s also sobering to hear a Chinese agency tell us our government is too big to be sustained by America’s flagging level of growth.

Mark Calabria of the Cato Institute offers a bit of cynical, but highly plausible, speculation for why the big credit agencies are lagging behind their smaller competitors in downgrading U.S. debt:

The simple truth is that the U.S. government has made more future promises than it will have the capacity to pay, under almost any circumstances.  The fact that the major rating agencies downplay these long term imbalances is further testament to their entrenched monopoly status.  But then when the government provides you with some regulatory protections, its only natural to assume the government will expect one to return the favor.

The death spiral of unsustainable government involves going so far into debt that credit agencies become political organisms.  If the Big Three do what Egan-Jones did, it will cost us billions of dollars per year.  If they decide to follow the much harsher path of Weiss Ratings, our government is finished.  America cannot survive with a C-minus credit rating.  If we could handle such a poor rating, we wouldn’t be in danger of receiving one.  Being in debt up to your eyeballs is a miserable experience.  We indulge past mistakes by throwing away future options.