Our Debt Might Wreck Us as Early as 2013

Mark Noonan

Per Moody’s:

In the wake of the financial crisis and recession, Moody’s Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.

The key data point in Moody’s view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody’s managing director Pierre Cailleteau confirmed in an e-mail.

Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.

But under more adverse scenarios than the CBO considered, including higher interest rates, Moody’s projects that debt service could hit 22.4% of revenue by 2013.

What happens when we reach that point? Greece. And do keep in mind that Moody’s is a bit slack at this. They tend to downplay the bad news and pump up whatever positive is out there. We might already be worthy of a downgrade to AA.

There are two ways out of this:

1. Keep spending like mad and eventually have a Greece-like economic and political meltdown.

2. Balance the budget immediately.

If we go with 1, then it will be very painful and might lead to all sorts of dangerous complications here and around the world. There is no limit to how bad things could get if we spend ourselves in to oblivion.

If we go with 2, it will be extraordinarily painful, but only for a year or two. Once we’re balanced and starting to reduce debt, we can then proceed with no further fiscal problems, our bond rating will not only remain good but our whole financial outlook will improve as we’ll be the only healthy major economy in the world. Foreign money would pour in to our economy as we’d be the only safe haven for it.

Unfortunately, while Obama is in office, we’ll just keep spending. By the time we get him out, it might be too late to prevent the very worst from happening. Though we might get lucky.