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What would happen if the United States lost its AAA credit rating?

by Adam Crum – Monaco Rare Coins

Two years ago‚ a company that performs financial research and analysis on commercial and government entities and has a 40% share in the world credit rating market warned the United States government that it risked losing its triple A rating if it didn’t get its finances under control. That company was Moody’s and the warning was motivated by the future of healthcare and Social Security costs and long before the present financial upheaval.

Does our government deserve a triple A credit rating?

While the U.S. government has had a triple A credit rating since 1917‚ there are those who feel that if the United States were any other country‚ its coveted top-tier credit rating might have been stripped away by now.

“For too long‚ the U.S. has delayed making the tough but necessary choices needed to reverse its deteriorating financial condition‚” David Walker‚ chief executive of the Peter G. Peterson Foundation and a former comptroller general of the United States‚ recently wrote in the Financial Times. “One could even argue that our government does not deserve a AAA credit rating based on our current financial condition‚ structural fiscal imbalances and political stalemate.”

“The triple-A rating is undeserved‚” suggests Peter Morici‚ a professor of international business at the University of Maryland. “If Washington were a state capitol‚ we would have lost the AAA with the current budget.”

Here are just some of the reasons Mr. Walker and Professor Morici would make such statements:

* Equal to about 80 percent of total output of the United States‚ the Treasury Department recently reported that the total U.S. government debt is $11‚270‚547‚397‚564.64.
* With the U.S. relying on foreign buyers to keep its borrowing costs low‚ China and Japan alone hold more than $1.4 trillion of U.S. Treasury bonds as of March‚ according to U.S. Treasury data. A sovereign downgrade would certainly alarm at least some of those buyers.
* The Fed is now burdened by the same kind of toxic paper that has been plaguing private U.S. banks for several quarters.
* Leveraging its capital 48-to-1‚ Fed banks are holding total capital of just $45.7 billion against the sum total of $2.19 trillion in assets. Two years ago the ratio was only 27-to-1.
* The government’s $787 billion economic stimulus package and $700 billion bank bailout fund have strained the country’s resources and the jury is still out as to whether any of this will actually make a difference.
* The International Monetary Fund expects the debt-to-GDP ratio to hit 97.5 percent next year. Standard & Poor reaffirmed its AAA sovereign rating for the United States in January; however‚ the ratings agency also cautioned that the hundreds of billions of dollars committed to bailing out the banking sector would lead to a “noticeable deterioration in the U.S. fiscal profile.”
* The Chinese premier and the head of the People’s Bank of China have expressed concern over America’s long-term credit worthiness and the value of the dollar. China has also called for the creation of a new international reserve currency to replace the U.S. dollar.
* With a loss of 5.7 million jobs since December 2007‚ the number of workers collecting unemployment checks increased to a record of more than 6.6 million in the week ending May 9‚ the highest level of unemployment since 1983.
* The present economic situation in the U.S. is taking a huge chunk out of tax income‚ reported to be down 34%.
* Manufacturing in the U.S. Mid-Atlantic area shrank in May for the eighth straight month.
* States like California have been hit hard by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

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