Is The U.S. "AAA" Rating Really At Risk?

If you have ever seen a market get spooked or wanted to see something cause a stir, imagine if the U.S. government’s prized “AAA” rating was at risk.  That is exactly what the Financial Times was discussing this morning.  Be advised, that while this may be financial treason this is not the first time this notion has come up and this article in the FT does not really contain anything new nor any immediate threats of this.

We discussed this notion before ourselves on a long-term basis based partly on the start of the financial meltdown that was on the horizon.  That was back in April of 2008.

The FT has noted that Moody’s had noted the ongoing “healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades.”

The author is David Walker, chief executive of the Peter G. Peterson Foundation and former comptroller general of the U.S.  He said in the FT that either one of two developments could strip the US’s “AAA” rating. The first is that the healthcare reform must not further harm the government’s financial condition. The second is a failure of the federal government to monitor spending, tax and budget control choices.

Walker also noted that the president could create a  fiscal future commission, and noted that his foundation’s research showed that 90% of Americans want the federal government to get its own financial house in order.

The long and short is that the US has problems in its current financial condition, structural fiscal imbalances and political stalemate. Walker also wonders how a Triple-A rating is there when we have a negative net worth of $11 trillion and additional off-balance sheet obligations of some $45 trillion with deficit spending.

Be advised that this article is not actually addressing anything new.  Many have speculated or questioned the notion here that this could one day occur.  Pointing out caution about the Chinese not wanting to buy US Treasuries and pointing to a past rise in credit default swap costs for Treasuries is not a new issue.  That has largely remedied itself on the swap basis, and at the end of the day what would the Chinese really move their funds into without sending the premium or price through the roof?

The notion that the US could lose its Triple-A rating is one to ponder for a long-term basis, but probably is a notion that can be dismissed for anything in the near-term.  The notion is one where there becomes no safe haven for money which might even generate the great flush-out and fire sale theory, where you would see a monumental sale of stocks, bonds, and the US Dollar simultaneously.

If the U.S. actually lost its Triple-A rating, what would the rating be of other nations?

JON C. OGG