Friday, May 29, 2009

The future credit rating of the United States.

The noted economist John Taylor, famous for the Taylor Rule (which says the short-term interest rate set by the Fed should be negative five percent today) worries about it in the Financial Times.

He notes that Standard & Poor's has issued a downgrade warning for Britain's credit rating, and says it could happen to the U.S. too.

He doesn't note that the sovereign credit rating of the United States already has been projected to fall starting in 2017 by both Moody's and Standard and Poor's (with the latter projecting a fall all the way to "junk" by 2027).

Of course those projections were based on a "current policy" that was pre-recession, pre-Obama, and pre- the $7 trillion addition to the national debt that Obama is planning for the next 10 years ($9 trillion according to the Congressional Budget Office).

The amount already added to the debt over just the last year is put in personal terms by USA Today...

Taxpayers are on the hook for an extra $55,000 a household to cover rising federal commitments made just in the past year for retirement benefits, the national debt and other government promises, a USA TODAY analysis shows.

The 12% rise in red ink in 2008 stems from an explosion of federal borrowing during the recession, plus an aging population driving up the costs of Medicare and Social Security...

The latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA TODAY analysis.

Bottom line: The government took on $6.8 trillion in new obligations in 2008, pushing the total owed to a record $63.8 trillion ....

The number measures what would be needed today set aside in a lump sum, earning interest to pay benefits that won't be covered by future taxes....

What does this number, "63.8 trillion", mean? It's so huge people can't grasp it. (Surveys show they can't understand even one trillion!) And we're not paying it now, so a lot of people think it's not real.

But it will become real enough over the next 20 years as the surging number of retirees expect to be paid their Medicare and Social Security benefits, and their federal employee/military pensions. At that point this "implicit debt" will be rolled into the real, cash-needing, paid-with-taxes debt of the US government.

As noted in a post a little while back, this debt doesn't ever actually have to be paid down, but it does have to be carried. What's the interest expense on carrying $63.8 trillion?

Using the average long-term rate of 6% that the Social Security Administration Trustees use in their projections, it's $3.8 trillion per year. How much is that in personal terms?

[] Over 300 million Americans, that's $12,666 in taxes per head for each man, woman, and child, now matter how young or old, from newborn infant to great-grandparent.

[] Over the 117 million households in the US, that's $32,479 each.

If your unavoidable household expenses went up by $32,479 annually in taxes, what would your credit rating be?

We're on course to find out!