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Home >> United States & Canada >> Economics & Trade Uncle Sam's 'F'-rated bonds Prof. Peter Morici - 5/22/2009 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.
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".
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