Is the risk from too much debt or too little revenues? Politicians have employed the threat of a downgrade shamelessly to promote their ideological angle while completely ignoring the other. And, how real is the risk anyway?



The US debt rating is based upon two key components – the size of the debt and even more importantly to what degree can it be serviced, (payment of interest and principle as scheduled). Most Republican and Tea Party politicians have focused on the size of debt, but have largely ignored the revenue side, not just in terms of taxes but overall economic activity – greater GDP translates into higher tax revenues even if tax rates remain the same. The opposite is true as well.


The debt ceiling “compromise” just adopted by Congress and signed by President Obama carries a significantly higher risk to US economic activity and thus revenues generated. Thus, a downgrade is now significantly more likely to be triggered on basis of US economic activity stagnating, and at a critical point when the economy is most vulnerable. In terms of relatives, the US debt-rating prospect will be judged more by the deteriorating ratio of debt to US GDP rather than purely on basis of the size of the debt alone. As I have written before, the US is putting itself more into the position of Greece’s austerity even when it does not have to, and this is actually more likely to harm the US economically. (“US Damaged Regardless…” - diplomaticallyincorrect.org/films/blog_post/us-damaged-regardless-of-debt-default-stalemate-resolution-by-ambassador-mo/32743 )


There is a third consideration in the rating analysis: can the borrower access the market for new borrowings to roll over old debt into new. As the US $ is still the primary global reserve currency and US treasuries are the most liquid and cash like form of investment or way to park cash, there is no real risk for now of the US not being able to roll over its debt. However, the rhetoric and irresponsibility exhibited during the so-termed debate does do damage to the image and confidence that the US can be trusted as the globe’s primary banker. It is good to be the globe’s banker, (and the banker is not who holds the debt, like China, but those who issue and manage the debt and other financial instruments, primarily the US).


The US has some substantial challenges, including reigning in the spending. However, the recent debt debate has done more harm than good in any “spending cuts.” The US is going to suffer from both reduced growth/revenues and damaged image/confidence. Nonetheless, I do not expect a US debt downgrade, with the exception of a Chinese based rating agency, Dagong, which has already twice lowered the US. There will be more “warnings” from the rating agencies regarding US Government debt. However, it is even methodologically rather difficult to see how a downgrade can be effected as the full faith and credit of the US is the theoretical baseline by which all other corporate and sovereign ratings have been measured. Part of this analysis is not pure economic and financial markets, but also political stability. While the US political image is tarnished after the “debt compromise,” would you as an investor rather put your money in US debt or Chinese, even if China is the globe’s new economic rising star?


Related ARTICLE – “Cut in US Economic Growth Forecasts” - diplomaticallyincorrect.org/films/blog_post/cut-in-us-economic-growth-forecasts-by-ambassador-mo/32753


Related Reports at “International Financial Crisis Channel” - diplomaticallyincorrect.org/c/international-financial-crisis









By Ambassador Muhamed Sacirbey








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