U.S. Credit Rating Affirmed

Econintersect:  Both Moody’s and Fitch have reaffirmed the AAA credit rating for U.S. Treasuries.  And both have warned that downgrades are still possible should the country not follow through with debt reduction measures and the economy weakens.  After Pres. Obama signed the new debt plan law on Aug. 2, Moody’s said the outlook for the U.S. credit rating is now negative.  Standard and Poors has had the U.S. on a negative credit watch since July 14 and has not joined the other two rating agencies with a reaffirmation of AAA. Many economists have warned that credit rating downgrades would put the U.S. at risk of having to pay much higher interest on its debt.  Others have pointed out that credit rating is not the overbearing determinant of interest rates.  After Japan’s credit rating was downgraded to AA- in January, interest rates there have remained even lower that the U.S.  Japan was downgraded from AAA in 2001 and the country has continued near zero interest rates ever since.

Mohamed El Erian, chief executive and co-chief investment officer of PIMCO, said the outlook for the U.S. was materially darkened in an Op Ed at The Financial Times on August 3. He said the law threatened an already fragile outlook for economic growth and job creation.  El Erian criticized the debt law as failing to provide any meaningful plan for deficit reduction but still provided all the negative implications for economic growth that a meaningful plan would have had.

Editorial note: An attempt to paraphrase El Erian:  The law provides much of the pain and little of the gain a meaningful plan would have had.

An GEI Opinion Blog article by L. Randall Wray goes a lot further into the gory details of what is happening.  Wray likened the result of the new law to be a “Rube Goldberg machine,” designed to dismantle the economic security that has been earned by the masses over lifetimes rather than reform in a manner that would make a stable society sustainable.

Sources:  Bloomberg, BBC, GEI Opinion Blog and The Financial Times