Banana Republic, Here We Come

There are any number of things that many Americans take for granted as far as their country is concerned.

To begin with, they probably assume that our military capabilities are without peer. At the very least, that seems at odds with the experiences we've had in Iraq and Afghanistan.

Moreover, no small number of my fellow citizens probably believe that the U.S. is still the gold standard in terms of its global financial standing. In fact, as I've noted here and in my book, there's plenty of evidence to suggest otherwise.

But for those who haven't been paying as much attention as they should, the following report from the Financial Times, "Moody’s Says Spending Threatens US Rating," may prove to be something of an eye-opener.

The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s, the credit rating agency, said on Thursday.

The warning over the future of the triple-A rating – granted to US government debt since it was first assessed in 1917 – reflects growing concerns over the country’s ability to retain its financial and economic supremacy.

Most analysts expect future governments to deal with the costs of healthcare and social security and there is no reflection of any long-term concern about the US financial health in the value of its debt.

But Moody’s warning comes at a time when US confidence in its economic prowess has been challenged by the rising threat of a recession, a weak dollar and the credit crunch.

In its annual report on the US, Moody’s signalled increased concern that rapid rises in Medicare and Medicaid – the government-funded healthcare programmes for the old and the poor – would “cause major fiscal pressures” in years to come.

Unlike Moody’s previous assessment of US government debt in 2005, Thursday’s report specifically links rises in healthcare and social security spending to the credit rating.

“The combination of the medical programmes and social security is the most important threat to the triple-A rating over the long term,” it said.

Steven Hess, Moody’s lead analyst for the US, told the Financial Times that in order to protect the country’s top rating, future administrations would have to rein in healthcare and social security costs.

“If no policy changes are made, in 10 years from now we would have to look very seriously at whether the US is still a triple-A credit,” he said.

Mr Hess said any downgrade in the US rating would have serious consequences on the global economy. “The US rating is the anchor of the world’s financial system. If you have a downgrade, you have a problem,” he said.

Moody’s did once threaten to cut the rating of some of the US Treasury’s debt when Congress refused to pass the president’s budget in the mid-1990s.

Comments

[Independent Accountant]

Yes, we are becoming a banana republic. The FT had an article about a week ago likening the US situation to that of the Ottoman Empire in 1870.

[yeehaa99]

I agree (http://hisnher.blogspot.com/2008/01/is-international-new-synonym-for-growth.html) with your post

[the_economist]

How can a country 9T in debt have tripple A rating?...We slipped on our own peel many years ago. Bananas for everyone!

[B]

I have to disagree with most of this. It is obvious we have a debt bubble. The derivatives issue may come to pass because of the cycle we are in. And, it may trigger many losses. But to view "the next ten years" as accumulating more debt is really stretching it. At times like this, markets force change on government whether they want it or not. So, either government will get its spending in order or the markets will fix the problem violently for them. The spending party is over. Now, it's time to fix accumulated problems. And, we will. Might it be extremely painful in the interim? It most likely will.

Re the $9 trillion in debt. That is an irrelevant number. Who cares if it is 9 quadrillion? It's if the debt is manageable and a society's ability to repay. We could all fret forever about debt but look at Thailand. No debt and a financial crisis that collapsed their economy for a decade. The anticipated revenue growth from Federal taxes is $250 trillion over the next 50 years. Is $9 trillion manageable? Moreso than most countries whose debt to tax and debt to GDP exposure is MUCH higher than the U.S. Some day the U.S. may have 9 quadrillion in debt. And, if the dynamics are relatively contructive, who cares?

[Bruce]

Re: Economist

Actually, I respectfully disagree with your sentiments. My personal opinion is that the best thing that could ever happen is a complete and total collapse of the global financial system. I know that sounds terrible but in the long term, I think it would be in our best interest to just wipe out everything--including a stock market and economic system that is inherently corrupt--and simply start over again. I'm not a pessimist, I'm a realist. I think the time has come to get our heads out of the sand and realize that we can't keep living like this...

[needles]

Its not like AAA means anything. MBIA is AAA and they're paying 14% on their bonds. If that's not a sign that ratings mean nothing, than nothing does.

[A]

B.
One day it may come to that whether we want it or not. Not sure why you say it may be best. What happens to those that have sacrificed to save up a few bucks? Loose it all? It happened to many families in Europe during both world wars. All: This thing about repaying debt, who do we repay it to? The non government related privately owned "Fed"? When new leadership steps in, some countries "wipe out" debt and they get a clean slate to work from. I guess it depends who they owe money to.... The Fed can do a lot to help if they want to as it only costs them $26 print a thousand bills. But it depends on their alterior motive. It is all about central bank control. Who control the banks control the governments. They have us all by the scrotum and the little man always suffers while those in control laugh all the way to the bank. Back to the original point. For someone who has nothing to loose, I would agree it wouldn't matter if the system dies and is replaced. Even if this were to happen I would trust them to devalue any savings you may own as much as possible. But if you have debt, they would try to still collect as much as possible. They won't make that disappear like they would your money. Yes I would have that much confidence in them. Yes I have lost my faith and trust in those in power being political or the banks. Because they don't care a rats ass about the little guy.

[A]

P.S.

I would agree it would be best if it were to mean the elitists and corrupt are thrown out of power. But the realism will be, it will happen for them to only tighten the reins and usher in their long awaited new world order.

But to get back on topic, I do hope adjustments can be made so that the dollar will regain strength and that confidence in the markets will be re-established.
Cheers all

[roger pasa]

Deflationist /inflationist not the only ones that correctly anticipated the currant crisis,45 years ago i saw this coming.It is possible to grasp the reality of this world if your thinking is based on solid material ground.I regard most economist as Hight Priest theorizing on how many Angels can fit on the head of a pin.For one thing this system is based on accumulation a process that can only go so far befor it crumbles