U.S. Treasuries should be downgraded to junk bond status, not given a “triple-A” government rating, economist John Williams says, supporting a warning issued by Moody’s last week that the credit rating of the U.S. government may be plunging in the next decade.
The issue surfaced recently when Reuters published a Moody’s warning that in the next 10 years, the credit rating of the United States is at risk of being dropped below triple-A.
“We decided to raise the flag,” Tom Lemmon at Moody’s told WND, “because the underlying credit rating of the U.S. government faces the risk of downgrading in the next 10 years if solutions are not found to our growing Medicare and Social Security unfunded obligations.”
Williams, author of the Internet newsletter ShadowGovernmentStatistics.com, said the credit-rating problem is immediate, not long-term.
“The U.S. Treasury is currently issuing 10-year notes and 30-year bonds,” Williams pointed out. “Yes, the U.S. government can always print money, but the question is whether the investors buying these Treasury securities will get paid off when they get their money back.”
Williams fears the U.S. is going through a period of “stag-flation,” marked by a combination of slower economic growth accompanied by inflation, an economic condition the United States has not faced since the Carter administration and the 1970s.
Additionally, the declining value of the dollar means holders of long-term U.S. Treasury securities are likely to be paid off in dollars of considerably reduced value, compared to the value of the dollar at the time the securities were purchased.
“The total unfunded debt obligations for the federal government, including the net present value of the future Medicare and Social Security unfunded obligations, is now nearly $60 trillion,” Williams told WND. “This is more than five times the total Gross Domestic Product of the United States.”
“A ratio of 5-to-1 of unfunded debt obligations to GDP is more typical of third-world country than a triple-A rated country, such as the United States is supposed to be,” he said.
The credit rating of the United States is critical because the federal government relies on sales of Treasury notes and bonds to finance federal deficits.
U.S. government securities rated as junk bonds will be much more difficult to sell to investors including foreign governments, with the result the bonds will be more expensive for the U.S. to issue, requiring much higher payouts to induce investors and foreign governments to take the added risk of repayment.
“The Bush administration has not succeeded with plans to reform Social Security and has not made serious proposals concerning Medicare, other than to add on a prescription drug benefit,” the Moody’s Sovereign Credit Analysis for the United States noted last week.
The Democrats taking control of Congress in the November 2006 mid-term elections “ended the prospect of major policy initiatives by the current administration,” the Moody’s report concluded.
Nor was Moody’s confident Democratic presidential candidates had the political will to make the needed reforms to Medicare and Social Security, especially since Hillary Clinton, Barrack Obama and John Edwards have all promised various forms of universal health care which would increase costs by giving government-funded health care to those now uninsured.
Medicare and Social Security had been cited as the largest threats to the long-term financial health of the United States and to the government’s triple-A rating, Moody’s analyst Steven Hess told Reuters, as Moody’s issued the report.
The General Accountability Office has also pushed the same alarm button.
David Walker, Comptroller General of the United States, has warned Congress the federal government’s unfunded liabilities in light of growing Medicare and Social Security obligations soon to be due retiring baby boomers was $53 trillion as of Sept. 30, 2007. That was up from $20 trillion as of Sept. 30, 2000, some eight months after George W. Bush took office.
As WND previously reported, the Treasury Department’s annual GAAP-accounted 2007 Financial Report of the United States Government suggested the real 2007 federal budget deficit was $4 trillion, not $163 billion previously reported by the Bush administration on a cash accounting basis.
The calculations in the Treasury’s 2007 financial report are calculated on a Generally Accepted Accounting Practices basis that includes year-for-year changes in the net present value of unfunded liabilities in social insurance programs such as Social Security and Medicare.
Under cash accounting, the government makes no provisions for the future Social Security and Medicare benefits in the year in which those benefits accrue.
The approximately 76 million U.S. citizens born between 1945 and 1964 represent some 28 percent of the U.S. population. In 2008, baby-boomers born in 1946 will be able to receive their first Social Security payments, if they opt for early retirement at age 62.
“Simply said, holding revenues constant, required Medicare, Medicaid, and Social Security spending and the related deficit financing costs will far exceed the Government’s ability to pay,” the Citizens’ Guide to the 2007 Financial Report of the United States Government concluded.
“The spending for social insurance programs,” the Treasury’s Citizen Guide continued, “is projected to grow at an alarming rate under current law.”
The concern about the debt rating of the U.S. makes more problematic the future payment of Medicare, Medicaid and Social Security obligations that today are being accrued by about-to-retire baby boomers.
As the 2007 Financial Report of the United States Government pointed out future Medicare, Medicaid and Social Security obligations are dramatically unfunded at current obligation levels.
Moreover, the future obligations due retiring baby boomers will have to be paid by a smaller group of U.S. workers who will have to pay higher yields to sell downgraded, possibly junk-bond rated U.S. Treasury debt to attract potential buyers, the critics said.
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Editor’s note: The November issue of WND’s monthly Whistleblower magazine, titled “HOW GLOBALISM IS DESTROYING THE U.S. ECONOMY” – focuses exclusively on the future of the U.S. economy, and answers key questions like: “If inflation is so low, how come food and energy cost so much?” “What is the ‘housing bubble,’ and why did it burst?” “What’s really going on with the stock market?” “Is America heading into a recession?” “Will the dollar collapse in 2008?” and “What will happen to the price of gold?”