Debt disaster dead ahead
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.”
By RICK BERMAN at POLITICO
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.”
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