Monday 19 September 2011

The US' credit rating, the peril of interest rates and the need for wholesale reform

As you know, S&P downgraded the US' credit rating to AA+ last month. That's still a lot better than most countries in this financially shaky world. But as long ago as July 2010 Dagong, a credit rating agency working for America's biggest foreign creditor, China, rated the US "AA with a negative outlook".

Here are a few graphs to tell the story of US public debt, and the cost of paying the interest on it as a proportion of gross Federal tax collections:

This next one might be a little surprising, even heartening:

That is greatly influenced by the long-term decline in interest rates:

For the period up to and including fiscal year 2000, the average rate on public debt was slightly over 7%, and has been reducing since the recession of the early 1990s in order to stimulate (and then rescue) the economy.

Now let's look at what interest would have been payable in dollar terms, if the rate had been (say) 7% throughout:

Had that 7% rate been applied throughout, this is what it would have taken out of the gross tax collections:

That is the big worry, and why I don't doubt that there's a lot of collusion and fudging going on behind the scenes.

But that doesn't make me a Tea Partier. This is not a story about wicked old government and how we'd be better off without it altogether.

The reason why debt has become particularly dangerous over the last couple of years, is that Uncle Sam has been trying to save our bacon. Perhaps he's done it in the wrong way, and should have let gambler banks go down - you have so many more second tier banks to take over, unlike here in the UK. Maybe it's not too late to for the US to do that, in a controlled way, even now.

And yes, we all need to look at social benefits, though again I'm not with the let-the poor-starve party. For example, we might just possibly question the profits of pharmaceutical companies (with their endless me-too variants on perfectly good drugs that are coming out of copyright); the profits and contractual get-out weaselling of insurance companies; the battening of lawyers on the medical system; the training costs and remuneration of the medical profession. There is more than one way to trim the fat, apart from abandoning US citizens to bankruptcy, ill-health and premature death. Can we please get away from an Orwellian Animal-Farm-style slogan-bleating of "private good, public baaad"?

I do have an issue with both the US and UK governments, not about their power and control but the exact reverse: their failure to moderate the growth of private debt over the last 30 and more years. Counterintuitively (if you think the Right is responsible with money), it was under President Reagan and Prime Minister Margaret Thatcher that total debt to GDP soared, as I discuss at length in a previous post here, and most of that was private debt. Fighting one foe, they failed to notice the manoeuvering of another, namely the psychopathic greed of the financial industry whose aid they requested.

I am reminded how Ireland's freedom was lost because the King of Leinster invited the Normans to assist him in recovering his throne in Wexford, in 1169. Guinness-drinking Irish sentimentalists may lament "the Saxon foe across the water", but their real enemy was the bloodthirsty, land-hungry, Viking-descended Norman, and King Dermot MacMurrough, who let him in.

Both public and private sectors are due for reform.

INVESTMENT DISCLOSURE: None. Still in cash (and index-linked National Savings Certificates), and missing all those day-trading opportunities.

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Don't have one said...

Have I understood this correctly that even at the low current interest rates the US is pay nearly 20% of income tax services its' debt?

James Higham said...

their failure to moderate the growth of private debt over the last 30 and more years

You mean by moderating the banks in what they can and can't do?

Sackerson said...

Myopia: yes, but that's 20% of total revenue, not just income tax, and it's been going on for a long time.

James: yes.

Don't have one said...

I really didn't realise it was that high - basically they're heading toward a position where they're be unable to raise rates less they bankrupt themselves!

Sackerson said...


Sebastian Weetabix said...

Hyperinflation beckons to deal with the debt, methinks.

The Arthurian said...

1. Nice graphs, Sackerson.

2. Your paragraph that starts "And yes, we all need to look at social benefits..." ends really well. Blogger to blogger, I like your style.

3. Thanks for the bit o' history on Leinster. Never heard of that one before.

Sackerson said...

Arthurian, thank you.

Sebastian, that's what I used to think. But (a) the Government no longer issues its own money directly, as was the case in Germany in 1923; (b) since the elite (elements of whom run the money issuers) have sucked up most of the cash, they are powerfully incentivised not to let it become worthless; (c) inflation is complex - many big ticket items are declining in value, while food and energy costs are rising.

So I think sufficient inflation will be permitted to sweat the poor and the middle class, but not enough to ruin those at the top.