The US Debt Downgrade

by robekulick

So S&P has gone ahead and downgraded the US debt from AAA, the highest rating to AA+. The following article lists the countries that still have AAA ratings:

The list includes England, France, Australia, Sweden, Germany, Switzerland and more. Thus the US  is now, according to S&P, less credit worthy than the debt of England or France. In reaching this decision S&P has argued that the US debt as a percentage of GDP is no longer in line with the debt to GDP ratio of a AAA rated country.

Here are the IMF estimated of the 2011 debt to GDP ratio for all countries in the world:

The US has an estimated debt to GDP ratio of of around 99% for 2011. True countries like Switzerland and Sweden have a debt to GDP ratios of 37% and 41% respectively. But France, England, Canada and, the fiscal powerhouse of Europe Germany, have ratios much closer to the US of 88%, 82%, 80%, and 76% which are much closer to the debt level in the United States.

So is the downgrade warranted based on this data? I think not. The US’ higher rate of debt reflects a number of factors. Certainly, as anyone who knows me knows well, I think the long-term debt situation in the United States must be addressed. But the problem is not our current level of debt which is not un-manageable, but rather what demographics say about our future debt. Over the next 20-30 years the retirement age population will expand rapidly putting immense pressure on Social Security and Medicare. If the US does nothing, then eventually these problems will throw us into a true debt crisis. However, the same is true for all the developed economies. Furthermore, since Europeans have fewer children then people in the US, are much more hostile to immigration, and,  particularly in France, are known for their largess towards the elderly, the situation looks even more dreadful abroad then it does here. Furthermore, the US economy has typically grown at a faster rate then these economies and has an easier time increasing tax revenue when necessary, which all suggests the US is as sound if not more sound then these countries. Finally, the markets seem to agree with this sentiment. The following link shows the 10 year bond rates for various countries:

The interest rate on the US 10 year bond is around 2.96%. For England it is 3.11% and for France it is 3.41%. So really what I think is happening is that S&P is just showing us how silly their whole rating system really is…which of course is unsurprising given how poorly their ratings fared for CDOs and mortgage debt. Whether this downgrade will be bad for the US economy is another question, and I guess we’ll start to get an answer on that tomorrow when the markets open.