“Why the USA will not get downgraded”
Gluskin Sheff’s David Rosenberg weighed in on Wednesday on the likelihood of a sovereign downgrade for the US of A (emphasis FT Alphaville’s):
I realize this it is borderline heresy to say anything positive about the U.S. economy so I will just say something that is less positive. It is highly unlikely that the U.S. government will ever default. Why? Well, it can always print dollars — and all its liabilities are in dollars.
Not only that, but it was comical to see the markets focus on the U.S. dollar and the Treasury market following the downgrade to the U.K.’s credit outlook. There is no use comparing the diversified economic base between the two countries.
Not only that, but the taxing capacity in the United States is much larger — government revenues absorb 42% of national income in the U.K. versus 33% in the U.S.A. Those comparable figures are 43% in Germany, 46% in Italy, and 49% in France. In Canada, it is 40%. But here is the grim reality for American workers, especially those in the upper income echelons. The President ran on a campaign to redistribute income, and at the same time he has beefed up what was already a near-intolerable deficit, and as we saw in the 1930s as the top marginal tax rate climbed to nearly 80%, Uncle Sam is going to be increasing its revenue take for a long, long time. The era of the word ‘tax’ being a dirty three-letter words in the United States is about to come to a close, if it hasn’t already in areas like New York, where the top rate has already risen to 46%. Shades of Ontario during the Rae years of the early 1990s.
Which is somewhat more optimistic than he said last Thursday, after S&P revised its outlook on the UK to negative from stable:
Don’t think for a second that the same cannot happen to the USA at some point judging by the massive runup in government debt and debt guarantees.
In fairness, last week he was responding specifically to the possibility of an outlook revision, which is much more likely than an outright downgrade of the US credit rating.
Moreover, S&P seems to want to allay concerns that it is even considering any such thing. Here’s Bloomberg on the matter:
Standard & Poor’s decision to cut its outlook on Britain’s top credit rating doesn’t signal a similar move for the U.S. will follow, said Moritz Kraemer, S&P’s head of sovereign ratings for Europe, Middle East and Africa. “I want to make it very clear that the negative outlook on the U.K. is not a secret message to Washington,” Kraemer told reporters at a media briefing in Johannesburg today. If we wanted to talk about the U.S. then we’d talk about the U.S.”
And, echoing Rosenberg:
The U.S. has the “enormous privilege of controlling the world’s most important reserve currency,” allowing it “to borrow almost without limit,” Kraemer said. U.S. debt has a “top notch credit rating” and is “very safe,” he said.
S&P estimates that 48 percent of all U.S. Treasuries are held abroad, “mostly by central banks,” Kraemer said. The percentage of U.K. gilts held by foreign central banks “is in the lower thirties” and less than that for Germany, he said. There is no “serious contender” to threaten the dollar’s status as a global reserve currency, Kraemer added. The euro is the “only credible alternative” to the dollar, though it’s “not mature enough,” he said.
Everyone calm down, then (and here’s looking at you, Bill Gr0ss).
UPDATE at 16:45 - Moody’s is now weighing in, with a press release titled “US government’s Aaa stable despite increased debt burden” (emphasis ours):
New York, May 27, 2009 — Even with a significant deterioration in the US government’s debt position, its rating has a stable outlook and demonstrates the attributes of a Aaa sovereign, says Moody’s Investors Service in its annual report on the United States. These attributes include a diverse and resilient economy, strong government institutions, high per capita income, and a central position in the global economy.
“Moody’s expects that, because of these factors, US economic strength will emerge after the crisis without major impairment,” said Moody’s Vice President Steven Hess, author of the report. “The global role of the US currency also contributes to the ability of the economy and government finances to rebound.”
He said the government balance sheet has been weakened by the combination of efforts to stabilize the financial system, the effects of the sharp economic recession on federal finance, and the $787 billion federal stimulus package passed earlier this year. The result has been much higher debt ratios that may persist for some years to come. While these ratios are deteriorating in the US, they are also doing so in most other advanced economies due to the global recession.
Furthermore, the level of debt is less important than the government’s balance sheet flexibility, which Moody’s believes is still high in the case of the US. Despite a worsening government balance sheet, Moody’s cites other factors in support of the Aaa rating. “The current economic downturn has only temporarily altered America’s productivity dynamic, and productivity has risen in the recession period, as is typical,” said Hess. “US labor market flexibility has been a key factor in this trend.”
A higher rate of US population growth through 2025 relative to other advanced economies will also contribute to continued economic growth — and government revenues.
“While our outlook for the US rating is stable, a reassessment of the long-term growth prospects of the economy and the ability of the government to return to a sustainable debt trajectory could put negative pressure on the rating in the future. How the economy and fiscal policy fare after the recession will be key,” said Hess. He added that, over the longer term, contingent liabilities related to Social Security and Medicare programs could also pressure the rating.
Related links:
Exploding debt threatens America - FT
Marc Faber: Hyperinflation coming to the USA - FT Alphaville
On the not-unlimited appetite for government bonds - FT Alphaville
The question of default by the US is not an economic issue, but a political issue. The question is really about whether or not US politicians would favor a default at some point. The clear answer to that is that they would, under the right circumstances, such as needing the issue to win an election. I would look to whether or not politicians start blaming China and the giant foreign pool of money for US problems. That is a good default indicator.
Likely. No. But aren't we all a bit dubious now of our ability to predict the future?
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