US Debt Downgrade – Let’s Get Real!

The topic de jour on the cable ‘news’ outlets is a possible downgrade of United State Treasury debt. Granted the antics in congress are sophomoric at best and certainly cause for concern, but to worry much about a possible downgrade of US debt is even more absurd.

First, the ratings agencies have a woeful track record of actually making any calls with respect to bond ratings of publicly traded companies. Where was S&P and Moody’s when Ernon collapsed? Why did so much toxic mortgage debt that led to the credit crisis in 2007 and 2008 receive a AAA stamp of approval from these same agencies that now threaten to downgrade US Treasuries? Why were the ratings agencies asleep at the wheel when AIG went so deep in the red that the US Government had to step in and bail them out? It is hard to see how these agencies have any credibility left. Perhaps this is just their way of inserting themselves into what is basically a political discussion, or maybe they have been wrong so often they feel a need to generate publicity for themselves.

Secondly, the US debt problem is not one of the ability to pay, but rather a political posturing for an upcoming election. Take a look at the following chart of countries that currently have AAA ratings for their sovereign debt.

Countries with AAA rating

	GDP (Billions)	Public Debt	Public Debt as % of GDP
United States	$ 14,720.00	$ 8,670.00	58.9%
Australia	$ 889.60	$ 199.27	22.4%
Austria	$ 332.90	$ 234.36	70.4%
Canada	$ 1,335.00	$ 453.90	34.0%
Denmark	$ 204.10	$ 88.99	43.6%
Finland	$ 185.40	$ 89.73	48.4%
France	$ 2,160.00	$ 1,814.40	84.0%
Germany	$ 2,951.00	$ 2,213.25	75.0%
The Netherlands	$ 680.40	$ 439.54	64.6%
Norway	$ 276.40	$ 131.84	47.7%
Singapore	$ 292.20	$ 299.21	102.4%
Sweden	$ 354.00	$ 144.43	40.8%
Switzerland	$ 326.90	$ 130.76	40.0%
United Kingdom	$ 2,189.00	$ 1,674.59	76.5%
Total Ex US	$ 12,176.90	$ 7,914.27	65.0%

You should note that the United States GDP is greater than the GDP of all other AAA rated countries combined. The US debt as a percentage of GDP is less than the weighted average of all the other countries and is about the midpoint of this group.

Now ask yourself which of these counties you would trust more than the US to lend your money to. Some on this list are just too small. Those in the European Union have their own debt woes via the weaker partners in the EU (Portugal, Ireland, Greece, and Spain) and there is some concern about the stability and permanence of the Euro itself. Some say China is the next world economic power. But even after a decade of break neck growth, the GDP of China is yet only a third that of the US. Besides who would trust their money to a state controlled economic system where wealth can be wiped out by fiat and true economic growth is questionable.

Finally, consider what alternatives a global investor has. There is not enough liquidity for the global economy to function without the US. Regardless of what the rating agencies threaten the US dollar and by extension US Treasuries, have always been and will likely continue to be for the foreseeable future, the de facto safe haven of the world. There is no country with the economic or military might to unseat the United States at the present time. When the going gets tough, everyone still turns to the United States as a refuge and looks to the United States for leadership. If US debt were downgrade to AA it would make no difference whatsoever. In the long run, all other debt is valued in relation to US debt. Sure maybe there would be a week or two of confusion, but in the end, regardless of the ranting of debt ratings agencies investors have voted with their pocketbooks that the United States is the premier credit on the face of the planet, and that should be enough.