The Corner

Too Much Debt Means U.S. at Risk of Losing AAA Credit Rating

I am sorry, but unlike Timothy Geithner, I think this is a big deal and that it could happen. According to Bloomberg News, Moody’s Investors Service is warning that the U.S. — and the U.K — “have moved ’substantially’ closer to losing their AAA credit ratings as the cost of servicing their debt rose.”

Pierre Cailleteau, the managing director of sovereign risk at Moody’s in London, is quoted as saying, “We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing. . . . There is inertia in the deterioration of credit metrics.”

The New York Times says Moody’s added, “Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

By debt affordability, Cailleteau is talking about how much interest we are paying on our debt. According to CBO, even at the current interest rate, by 2020, we will pay $700 billion in interest each year. See here.

Here is more evidence that our debt is deteriorating. Check out this chart.

Debt Held by the Public Reaches 60%

It compares Congressional Budget Office (CBO) long-term projections of the debt held by the public from 2010 with long-term projections calculated in 2007.

In short, the debt held by the public is the value of all federal securities sold to the public that are still outstanding. Simply put, the debt held by the public is the outstanding amount that the federal government has borrowed to finance deficits. This debt is held by individuals and institutions domestically as well as by foreign investors.

In 2007, the CBO projected that the debt held by the public would surpass 60 percent in 2023 — and this long-term projection incorporated policy changes that were likely at the time. Using the same methodology, this year CBO has projected that debt will exceed 60 percent of GDP by the end of 2010. In the three years between the projections, the anticipated onset of this debt milestone has moved closer by 13 years

This serious acceleration in the government’s debt is worth considering, and it should not be downplayed in order to spend even more money and pass a miserable health-care reform bill.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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