With the U.S. government deficit hovering around a trillion and a half dollars, our nation’s creditworthiness is coming under increased scrutiny. The Congressional Budget Office issues budget outlooks that get grimmer and grimmer, and even those bleak projections are the result of implausibly rosy assumptions.
The journey to insolvency can be quick, or it can be slow, but most analysts agree that the first signpost along the way will be the withdrawal of the U.S.’s coveted AAA bond rating. And when that happens, woe be unto him that owns government bonds.
Throughout modern history, the U.S. has had a relatively low cost of funds because Moody’s and the other ratings agencies have given it the highest rating possible. If Uncle Sam loses that rating, then borrowing costs will increase. These higher costs will make the U.S. fiscal situation more untenable, inviting subsequent downgrades and an ultimate death spiral that can be stopped only by massive policy intervention.