AAA Rating Tough to Defend as U.S. Debt Soars: Kevin Hassett

Kevin Hassett, Bloomberg.com

By Kevin Hassett - Jan 30, 2011 7:00 PM MT

Bllomberg.com

Last week, Standard & Poor’s lowered Japan’s bond rating to AA-, the fourth-highest level. By that standard, the U.S. got away with a slap on the wrist from Moody’s Investors Service, which warned merely that “the probability of assigning a negative outlook in the coming two years is rising.”

If you look at the U.S. budget trajectory with an eye on the lessons from Japan’s recent history, there’s a strong case that the U.S. rating should be cut immediately.

It’s true that the U.S., with total government debt equal to 98.5 percent of gross domestic product, according to Organization for Economic Cooperation and Development data, has many years of unrestrained deficits ahead before it reaches the crisis point of Japan, which has debt of 204 percent of GDP.

A more plausible target, however, is 135.4 percent of GDP. That was Japan’s debt in 2000, just before S&P first downgraded it from AAA in February 2001.

If the U.S. makes no fiscal progress, and continues to run annual deficits at the 2011 level of $1.48 trillion dollars, it will take just six years to reach a debt level of 135.3 percent of GDP. The Japan precedent suggests the U.S. would lose its sacrosanct AAA rating at that point, if not sooner.

To be fair, the Congressional Budget Office, in its forecasting, predicts that the U.S. will do better than that, in part because revenue should increase as the economy recovers.

CBO’s wholly unrealistic baseline forecast suggests the day of reckoning is far off. Don’t believe it.

Read more on this story here