Uncle Sam's "F" rated bonds
By Peter Morici
web posted May 25, 2009
Were the United States any other country, its bonds would lose their AAA rating.
Over the next four years, President Obama plans dramatic increases in spending on health care, 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 (billions) | $2157 |
2333 |
2685 |
3075 |
3305 |
| Deficit | 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 GDP growth and unemployment at 2.1 and 8.8 percent. Most economists agree and are forecasting growth averaging about three percent after that.
Simply, the tax base will grow more slowly than President Obama assumes, and planned taxes on CO2 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 percent 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 percent, 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, U.S. 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 President 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 U.S. 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 U.S. International Trade Commission.