Commentary Magazine


Topic: Moody’s

The Ticking Debt Bomb

Journalists often fixate on the absolute size of a government’s debt, coming up with imaginative ways to make it visible. My favorite (perhaps because I calculated it myself) is the American national debt in silver dollars. Lay the debt ($12,932,913,325,200.66 as of last Thursday) out in a line of silver dollars. Ignore the fact that there is not enough silver on planet Earth, mined and unmined, to mint that many silver dollars and that the silver content of an old silver dollar (0.7736 troy ounces) is now worth $14.12 as bullion. That line would stretch from the sun to the earth, back to the sun, back to the earth, and with enough left over to wrap around the equator 1,132 times.

But while this sort of thing is amusing, it doesn’t tell us much. Instead, there are two relative measures that are important for assessing government debt. One is the size of the debt relative to the GDP. Having been at 57 percent in 2001, the national debt at the end of the first quarter of 2010 was 87.3 percent. While we have to take 9/11 and the recession that began in 2007 into account, that is a breathtaking climb in a decade that has seen no great war or great depression. The Congressional Budget Office (CBO) estimates that the debt under current fiscal plans will double by the year 2020, putting us back, at the least, to where we were in 1946, right after World War II, when the debt peaked at 129.98 percent of GDP.

The other measure to keep a firm eye on is the percentage of total government revenues that goes to pay interest on the national debt. As you can see here, that measure is, as well, on a very worrisome trend, with the CBO predicting that the interest, now about 8 percent of government revenues, will amount to 18 percent of revenues by 2018;  18 to 20 percent is the point where Moody’s and, presumably, other rating agencies would strip the U.S. of its AAA rating. That, in turn, would cause the price of borrowing money to go up sharply.

However, both the CBO estimates are predicated on the economy recovering fairly briskly from the recession and on interest rates remaining low. Those two predicates are, to a certain extent, contradictory. With the current sovereign-debt crisis, it’s entirely possible that all governments will have to start paying more to borrow new money and roll over maturing bonds. Moody’s projects that the cost of federal-debt service could reach 22.8 percent of government revenues as soon as 2013.

That would not only threaten our credit rating and drive up still further the cost of borrowing, but also increasingly constrain the ability of the government to pursue American interests. In the 1920s Britain was paying over 40 percent of revenues to service its debt from World War I, gravely limiting its ability to function as a Great Power. In the 1780s France was spending over 80 percent of revenues to pay interest on its debt, no small reason why the 1780s didn’t end well for the French monarchy.

The people seem increasingly aware of this looming threat. Just ask Senator Bob Bennett of Utah, denied nomination to a fourth term yesterday largely because he voted for the TARP bill in 2008. But do the political class and the Washington media? They had better, and soon.

Journalists often fixate on the absolute size of a government’s debt, coming up with imaginative ways to make it visible. My favorite (perhaps because I calculated it myself) is the American national debt in silver dollars. Lay the debt ($12,932,913,325,200.66 as of last Thursday) out in a line of silver dollars. Ignore the fact that there is not enough silver on planet Earth, mined and unmined, to mint that many silver dollars and that the silver content of an old silver dollar (0.7736 troy ounces) is now worth $14.12 as bullion. That line would stretch from the sun to the earth, back to the sun, back to the earth, and with enough left over to wrap around the equator 1,132 times.

But while this sort of thing is amusing, it doesn’t tell us much. Instead, there are two relative measures that are important for assessing government debt. One is the size of the debt relative to the GDP. Having been at 57 percent in 2001, the national debt at the end of the first quarter of 2010 was 87.3 percent. While we have to take 9/11 and the recession that began in 2007 into account, that is a breathtaking climb in a decade that has seen no great war or great depression. The Congressional Budget Office (CBO) estimates that the debt under current fiscal plans will double by the year 2020, putting us back, at the least, to where we were in 1946, right after World War II, when the debt peaked at 129.98 percent of GDP.

The other measure to keep a firm eye on is the percentage of total government revenues that goes to pay interest on the national debt. As you can see here, that measure is, as well, on a very worrisome trend, with the CBO predicting that the interest, now about 8 percent of government revenues, will amount to 18 percent of revenues by 2018;  18 to 20 percent is the point where Moody’s and, presumably, other rating agencies would strip the U.S. of its AAA rating. That, in turn, would cause the price of borrowing money to go up sharply.

However, both the CBO estimates are predicated on the economy recovering fairly briskly from the recession and on interest rates remaining low. Those two predicates are, to a certain extent, contradictory. With the current sovereign-debt crisis, it’s entirely possible that all governments will have to start paying more to borrow new money and roll over maturing bonds. Moody’s projects that the cost of federal-debt service could reach 22.8 percent of government revenues as soon as 2013.

That would not only threaten our credit rating and drive up still further the cost of borrowing, but also increasingly constrain the ability of the government to pursue American interests. In the 1920s Britain was paying over 40 percent of revenues to service its debt from World War I, gravely limiting its ability to function as a Great Power. In the 1780s France was spending over 80 percent of revenues to pay interest on its debt, no small reason why the 1780s didn’t end well for the French monarchy.

The people seem increasingly aware of this looming threat. Just ask Senator Bob Bennett of Utah, denied nomination to a fourth term yesterday largely because he voted for the TARP bill in 2008. But do the political class and the Washington media? They had better, and soon.

Read Less

Another Summit

The “jobs summit” today typifies the root of the Obama team’s misguided thinking on jobs. In place of policies that would aid in private-sector job creation, the administration has provided an oversold and ineffective stimulus plan, lots of dog-and-pony shows, much heated rhetoric about Wall Street excesses, and a grab bag of policies that makes things worse. For starters, the looming debt, as Robert Samuelson explains, has created ”the perception that the administration will tolerate, despite rhetoric to the contrary, permanently large deficits [that] could ultimately rattle investors and lead to large, self-defeating increases in interest rates. There are risks in overaggressive government job-creation programs that can be sustained only by borrowing or taxes.” But that’s not all, as Samuelson observes:

Obama can’t be fairly blamed for most job losses, which stemmed from a crisis predating his election. But he has made a bad situation somewhat worse. His unwillingness to advance trade agreements (notably, with Colombia and South Korea) has hurt exports. The hostility to oil and gas drilling penalizes one source of domestic investment spending. More important, the decision to press controversial proposals (health care, climate change) was bound to increase uncertainty and undermine confidence. Some firms are postponing spending projects “until there is more clarity,” [Moody's Economy.com Mark] Zandi notes. Others are put off by anti-business rhetoric.

The jobs summit ignores all that and offers up yet another campaign-type event in lieu of productive governance. This is at the heart of not only the jobs problem but also much of what ails the administration. Rather than a useless summit, the administration would do well to consider a package of tax cuts designed to bolster hiring and an agreement to hold off on job-killing legislation. (Gary Andres highlights a useful model for economic revival: the state of Texas.) But in fact, the administration is going in the opposition direction. That — and another dopey jobs summit — are surefire signs that the administration is a long way from getting its act together.

The “jobs summit” today typifies the root of the Obama team’s misguided thinking on jobs. In place of policies that would aid in private-sector job creation, the administration has provided an oversold and ineffective stimulus plan, lots of dog-and-pony shows, much heated rhetoric about Wall Street excesses, and a grab bag of policies that makes things worse. For starters, the looming debt, as Robert Samuelson explains, has created ”the perception that the administration will tolerate, despite rhetoric to the contrary, permanently large deficits [that] could ultimately rattle investors and lead to large, self-defeating increases in interest rates. There are risks in overaggressive government job-creation programs that can be sustained only by borrowing or taxes.” But that’s not all, as Samuelson observes:

Obama can’t be fairly blamed for most job losses, which stemmed from a crisis predating his election. But he has made a bad situation somewhat worse. His unwillingness to advance trade agreements (notably, with Colombia and South Korea) has hurt exports. The hostility to oil and gas drilling penalizes one source of domestic investment spending. More important, the decision to press controversial proposals (health care, climate change) was bound to increase uncertainty and undermine confidence. Some firms are postponing spending projects “until there is more clarity,” [Moody's Economy.com Mark] Zandi notes. Others are put off by anti-business rhetoric.

The jobs summit ignores all that and offers up yet another campaign-type event in lieu of productive governance. This is at the heart of not only the jobs problem but also much of what ails the administration. Rather than a useless summit, the administration would do well to consider a package of tax cuts designed to bolster hiring and an agreement to hold off on job-killing legislation. (Gary Andres highlights a useful model for economic revival: the state of Texas.) But in fact, the administration is going in the opposition direction. That — and another dopey jobs summit — are surefire signs that the administration is a long way from getting its act together.

Read Less