Is highest credit rating appropriate for U.S. government?

By DAVID MOON, Moon Capital Management, LLC
January 25, 2009


Earlier this week, the major bond ratings agencies cut the assessment of Spain's federal government debt from its highest rating, AAA, to AA+.

The ability to print money no longer guarantees a government the highest credit rating.

It's always been assumed that the United States is the safest financial place on earth. Our currency has long been called a 'safe haven.' When people are afraid of everything else, they invest in U.S. government bonds.

That's how yields on some government bonds were actually below zero percent for a short period a couple of weeks ago.

But does the U.S. actually deserve its AAA credit rating?

In 1802, President Thomas Jefferson directed Treasury Secretary Albert Gallatin to prepare an accounting of the 'finances of the Union as clear and intelligible as a merchant's books, so that every member of Congress and every man of any mind in the Union should be able to comprehend them, to investigate abuses, and consequently to control them.'

I reviewed the balance sheet of the federal government. I'm not sure how Secretary Gallatin did, but Secretary Paulson failed.

Think of your favorite charity. Imagine that for ten straight years the charity's audit included this disclaimer: 'The recordkeeping of this organization is so bad that we can't even tell you if these financial statements are accurate or not. This organization doesn't even follow the laws with respect to safeguarding its assets.'

That's been on the cover page of the U.S. federal government audit for the last ten years.

Even with the admitted reporting deficiencies, what do we know about our government's financial condition?

The U.S. owes $6.3 trillion to public investors. It owes another $4.3 trillion to intergovernment agencies, mostly money borrowed from Social Security. That $10.6 trillion in total debt is equal to about 74 percent of our GDP.

Spain's debt is 40 percent of its national GDP.

In the last 4 months, the federal government has been on a takeover spree. In the real world, this would have implications for its balance sheet. Most businesses that acquired 79.9 percent of the equity of insurance giant AIG would have to consolidate AIG's balance sheet into their own, causing the acquirer to assume another $950 billion in debt.

Fannie Mae? There's another $887 billion in debt. Freddie Mac? $818 billion.

Of course, the U.S. would also get to include the assets of those companies on its balance sheet, but what are those assets really worth? If the assets were so valuable, why did those companies need a bailout?

In the past year, the government assumed an additional $7.8 trillion in financial obligations ' almost equal to our accumulated federal government debt since 1776.

And none of this accounts for the exploding future Social Security and Medicare liabilities. The Government Accountability Office estimates that the net present value of those future liabilities is another $50 trillion or so.

Will the United States ever stop making interest and principal payments on its debt? I seriously doubt it. But a decline in its credit rating would cause an increase in borrowing costs. Don't automatically dismiss the possibility.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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