PRINT
EMAIL
COMMENT
BUZZ UP
DIGGEXECUTIVE POLL
Bernard Madoff, convicted of running an $65 billion Ponzi scheme, was sentenced to 150 years in jail. What’s your take on his punishment?
OUR PREMIUM CONTENT
The Kiplinger Agriculture Letter
The Kiplinger California Letter
Kiplinger's Biofuels Market Alert
Kiplinger's Retirement Report
SUBSCRIBER HELP
CURRENT LETTER
Overhauling
Financial Regs
PREVIOUS ISSUES
The idea of the U.S. losing its AAA debt rating isn’t far-fetched anymore. Standard & Poor's credit rating agency says the U.S. is taking on a huge risk in its commitment to back up troubled mortgage giants Fannie Mae and Freddie Mac. The duo hold, or guarantee, mortgages worth about $5 trillion, or about half of all outstanding U.S. mortgages. The figure also is almost half of the current total U.S. debt, now at $9.5 trillion.
Most analysts are not predicting a worst-case scenario in which the economy goes into a 1930s-like brutal and prolonged decline. But if it happened, most of Fannie and Freddie’s obligations would be taken over by the Treasury. John Chambers, chairman of S&P's sovereign rating committee, says his firm doesn’t expect a steep recession. But he is quick to add that "a severe stress scenario" poses a threat to the top-of-the-heap rating U.S. debt now enjoys.
Downgrades result in having to offer higher interest rates on new bonds sold to the public. And the value of outstanding bonds declines, hurting investors and the issuer, which in this case is the United States. Companies and countries suffer the same fate when their credit ratings are taken down a notch. A lower rating makes borrowing more expensive as investors, including mutual funds, pension funds, banks, and state, local and foreign governments, insist on higher yields in return for taking on a higher level of risk.
Downgrades to large and industrialized nations do happen. Earlier in August, S&P took Argentina down a notch. And during 2001, when Japan’s economy was reeling and its banks were wobbly, that nation lost its AAA rating.
Counting current and future obligations, the U.S. is $50 trillion in the hole, according to David Walker, former comptroller general of the U.S. He cites current debt held by the public plus about $7 trillion in Social Security IOUs and $34 trillion worth of obligations for Medicare benefits under current law.
The U.S. has held a AAA rating since the 1920s, but the fallout from the housing crisis has S&P, among others, expressing concern. And it’s not just the woes of Fannie and Freddie that are worrisome. Moody's has warned the U.S. about its looming future obligations to Social Security and Medicare recipients. And the federal budget deficit is rising, worsened by the cost of another year of war in Iraq. In the fiscal year starting Oct. 1, the budget deficit likely will top $500 billion.
There could be a silver lining to all the chatter about U.S. debt quality. The more rating agencies, regulators and investors talk about a debt downgrade, the more pressure it puts on Congress to slim down the annual budget deficit and to tackle long overdue changes in Medicare, where costs have doubled over the past decade to $391 billion a year.
For weekly updates on topics to improve your business decisionmaking, click here.
POSTED BY: Barbara Nelson (August 31, 2008 07:22 PM)
The US needs to stop incouraging illegals to come to the US and have babies. In most countries in the world, babies of illegals are still illegals.
POSTED BY: KENNETH W. FORTNER (September 26, 2008 11:55 AM)
IF THE GOVERNMENT WOULD LEAVE THE POOR ALONE AND GO AFTER THE RICH MULTIMILLON DOLLAR CEO'S, INSURANCE COMPANIES (THAT HAVE BILLIONS IN ASSETS)WE OULDN'T BE IN THIS MESS IN THE FIRST PLACE. WITH A PRESIDENT THAT DOES NOT UNDERSTAND THE ECONOMY, OR MUCH ELSE, WE CAN NOT EXPECT MORE INTELEGENT LEADERSHIP. YES, WE ARE A NATION OF WARRIORS, BUT WE WERE NOT A WARRING NATION UNTIL WE GOT HID IN THE BUSHES. PULL OUR TROOPS OUT OF THESES WARS (I&A), CLOSE OUR BORDERS AND LET THE REST OF THE WORLD TAKE CARE OF ITS SELF FOR A WHILE. USE OUR OWN RESOURCES AND LET THE OIL SHIEKS EAT THEIR OVER PRICED OIL. LEAVE MEDICARE ALONE(START INVESTIGATING THE DOCTOR'S AND HOSPITAL'S FOR PRICE GOUGING). REPAY SOCIAL SECURITY WHAT HAS BEEN STOLEN FROM IT. CUT THE UNEARNED PAY CHECKS OF THE POLITICIANS BY 50%(IE $275,00 COST OF LIVING RAISE THEY GAVE THEMSELVES LAST YEAR WHILE THOSE OF US ON SOCIAL SECURITY GOT A WHOPPING $25.00)WHEN THEY DON'T WORK THEM DON'T GET PAID. FIVE WEEK VACATIONS, FIVE WEEKS NO PAY. CUT OUT 50% OF ALL STAFFS IN WASHINGTON. BOY, COULD I HAVE FUN WITH A PAIR OF SISSORS AND THE BUDGET. YOU SHOULD WATCH THE MOVIE "DAVE"
POSTED BY: Nicholas Scott Cogdi (November 16, 2008 01:37 PM)
The whole point of the Social Security issue is that the money NEVER should have been borrowed (stolen)in the first place! I've got less than a $1 in change on my desk right now and it's more than is in these so called "trust funds". The U.S. will NEVER repay all its debts, it can't. According to the article above it is $50 Trillion dollars in debt counting current and future obligations. If you had a stack of $100 bills 4 feet high you'd be a millionare. Since 1 Trillion is 1Million times a million, you'd need 50 million stacks 4 feet high to pay it off. When you convert 200 million feet into miles that's 37,878.78 miles. The Earths equatorial circumfrence is only 24,902 miles. Dividing you get 1.52. in other words you'd need enough to go COMPLETELY AROUND THE WORLD OVER 1.5 TIMES! I look for Uncle Sam to start his printing press REAL SOON.
E-Mail Article
Print Article
Reprint Article
