Barack Obama assured us we’d always have AAA, and one more rating agency agreed with him today. Fitch Ratings not only kept the US at AAA for its Treasury notes, but also gave it a “stable” outlook. In doing so, Fitch implicitly rejected Standard & Poor’s political analysis:
Fitch Ratings said on Tuesday it affirmed the United States’ top-notch credit rating at AAA, giving the world’s largest economy a reprieve after it was downgraded by Standard & Poor’s little more than a week ago.
Fitch said the outlook for the rating was stable.
“The affirmation of the US ‘AAA’ sovereign rating reflects the fact that the key pillars of US’s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base,” Fitch said in its statement.
“Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to ‘shocks’.”
Fitch did send a warning about the debt, saying that it expected a political resolution for short-term deficit reduction measures as a sign of seriousness from the US. Even failing that, Fitch said it would be most likely to change its outlook to “negative” than to downgrade the rating a step.
In one way, this makes sense. Fitch is following the markets. Even after the S&P downgrade, American sovereign debt continued its popularity, and yields — our cost of debt — actually declined. Despite the escalating irrational debt and future liabilities in the US, we are still a better bet for large purchases than practically any other sovereign debt instruments.
However, it’s also unsustainable, which means that S&P might have used the wrong reasoning but have the better long-term sense of American debt. This chart showing the tidal wave of future liabilities as a percentage of American GDP clearly shows where we are heading:
Europe has the same problems, by the way, and they’ll get to the catastrophe before we do. A few of the European nations, Greece especially, have already arrived or will shortly. At some point we will have to decide whether to completely revamp our social programs to make them economically rational or switch to a command economy — and the latter will make the situation worse in the long run, as economic growth disappears. The sooner we make the changes necessary to eliminate the massive rise in unfunded liabilities, the less painful and more effective it will be.
Fitch’s rating may make us feel good now, but S&P’s is much more useful — and in the long run, more accurate.
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