Were the United States any other country, its bonds would lose their AAA
rating. President Barack Obama plans dramatic increases in spending over the
next four years on healthcare, the environment, education, and federal
employment. Yet the private economy, which must be taxed, is likely to grow
slowly, resulting in too much borrowing.
Despite the president's best efforts, banks still face hundreds of thousands of
home mortgage foreclosures. And they must work through new commercial real
estate loan defaults created by the recent wave of retail and manufacturing
bankruptcies.
Simply, banks will be lending less, and Americans will be buying and making
fewer homes, cars and just about everything else. Yet, Obama's federal revenues
and borrowing projections assume
robust growth and falling unemployment.
2009
2010
2011
2012
2013
Revenues
(US$ bn)
$2157
2333
2685
3075
3305
Deficit (US$ bn)
1841
1258
929
557
512
Real GDP (%)
-1.2
3.2
4.0
4.6
4.2
Unemployment (%)
8.1
7.9
7.1
6.0
5.2
Federal Reserve chairman Ben Bernanke does not agree. The likely base case -
not the adverse scenario - used for the Fed's Stress Tests for the 19 largest
banks posited 2010 gross domestic product growth and unemployment at 2.1% and
8.8%. Most economists agree and are forecasting growth averaging about 3% after
that.
Simply, the tax base will grow more slowly than Obama assumes, and planned
taxes on carbon dioxide emissions and high-income Americans will be tough to
implement.
For years to come, federal finances will likely look a lot like Obama's 2010
projection - the deficit at 50% of revenues and the Treasury borrowing $100
billion every month.
Borrowing costs could be cut in half by raising federal taxes paid by everyone
25%, but Congress is not likely to go along.
Moody's would be hard pressed to give any government with budget projections
like those an investment grade rating, but the United States is different.
The dollar is the global currency, and Washington can print dollars if no one
wants to buy new Treasury securities to pay off maturing bonds and finance new
spending. Nevertheless, US Treasuries are risky investments.
Internationally, interest-bearing Treasuries function much the same as
currency. Whether as Treasuries or currency, too many dollars in circulation
will instigate inflation as the global economy recovers.
Just the fear of inflation causes investors to demand higher interest
rates on virtually all dollar-denominated bonds issued by government agencies,
banks and corporations.
As Obama spends and borrows, the Treasury will have to offer higher rates on
new 10- and 20-year bonds, making comparable securities issued in 2009 and
earlier worth less in the resale market. That interest rate risk makes US
Treasury securities lousy investments.
For rating agencies, Washington's monopoly on printing dollars makes difficult
assigning a conventional rating between AAA and D on its bonds. Those can't
default but investors' capital is still at risk.
Perhaps a special grade: "F" for "flee them now before you get stuck".
Peter Morici is a professor at the Smith School of Business, University
of Maryland School, and the former Chief Economist at the US International
Trade Commission.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
