The Corner

Is America’s Bond Rating as Safe as Geithner Thinks It Is?

It is rich with irony that an administration so intent on exacting a pound of flesh from the financial community for the sub-prime crisis has a Treasury Secretary that is following the same path that Wall Street took to put our economy in jeopardy.

Treasury Secretary Timothy Geithner said recently that the United States “will never” lose its Aaa bond rating.  Geithner’s confidence conflicts with bond rating agency Moody’s assessment that without real deficit reduction or wild economic growth, we will see “pressure on the Aaa government bond rating.” 

Moody’s, having been chastised on Capitol Hill repeatedly for not lowering its rating of sub-prime securities prior to their crash, is unlikely to repeat that mistake.  And of course, if Geithner is wrong and our bond rating slips, it will considerably increase the government’s interest expense, which is already the fourth-largest expenditure in the federal budget. 

You might recognize Geithner’s “damn the torpedoes” sense of bravado.  Geithner was president of the Federal Reserve Bank of New York when mortgage-backed securities were thought to be rock-solid investments.  Wall Street, caught up in the mania of the housing bubble, could not even conceive of a world where the price of housing might go down, just like Geithner cannot conceive of a world where the United States might lose its Aaa bond rating.

But there are others who have conceived of such a world, and are actively trying to create it.  Last April at the G20 summit in London, Russia orchestrated meetings between G20 finance ministers to put the world on a path to using a new reserve currency and stop buying American debt.  Persian Gulf states — Abu Dhabi, Saudi Arabia, Qatar — have held similar meetings to plan how to begin pricing oil in denominations other than dollars, which would decrease demand for U.S. Treasury securities.  Recently, several Chinese military leaders took it to the next level by suggesting China dump large quantities of U.S. bonds as part of a multi-pronged strategy of retaliation against the United States for selling weapons to Taiwan.

China, Russia, and the oil-producing countries combine to hold about a third of our debt held by foreign entities, so any reluctance to purchase more of our debt is a huge threat to our bond rating and our fiscal stability.  For perspective, the aforementioned countries hold a total of about $1.1 trillion in U.S. debt; the Democratic budget has to fund a deficit of $1.4 trillion this year alone. The $1.4 trillion Obama deficit is in excess of three times the largest Bush budget; in fact, every projected Obama deficit over the next ten years exceeds the largest Bush deficit. 

Nancy Pelosi and President Obama charted a fiscal course for our country that everyone — including them — agrees is unsustainable.

As the Chinese military is making plans to use our debt as a weapon with which to hit us, the Democratic Congress keeps making plans to give them a bigger stick.

How close are we to a default event that would without doubt drag down our bond rating?  Right now, we are approaching a point where our national debt is equal to our gross national product — the entire annual economic output of the United States.  A study by Brookings Institution researchers of 35 default events shows that 25 of them occurred when the defaulting country had a lower debt to GDP ratio than the United States has today. 

As Nancy Pelosi and President Obama propose budgets that require record amounts of borrowing, those who lend the money are making plans to stop buying our debt — and the Treasury Secretary absolutely cannot imagine how this might turn out badly.

I’m hesitant to call this administration “tone deaf” on the dangers of our debt; they might just be deaf, because the warning bells are pretty loud.

 

Peter Roskam (R-IL) is a Deputy Whip and sits on the Ways and Means Committee.

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