While bailing out, U.S. is digging itself deeper into debt

November 05, 2008|By JAY HANCOCK | JAY HANCOCK,jay.hancock@baltsun.com

So far, American taxpayers have put up $1 trillion to rescue banks and consumers who borrowed too much. Congress will almost certainly approve a stimulus package of $300 billion or so more.

Total debt owed by the U.S. government just surpassed $10 trillion. The deficit for the fiscal year that began Oct. 1 should break a record.

All this money appears to have tempered financial turmoil and plunging confidence, at least temporarily.

But who will bail out the bailer?

That might be the next president's biggest challenge. It's a question debt-rating agencies are asking as they add the bailout to the soaring cost of Social Security and Medicare.

It's something investors are wondering as they have bid up by more than threefold the cost of insuring against a United States default.

"Obviously, if the government bails out the entire system, the credit of the government diminishes, and in my opinion Treasury bonds in the U.S. should already be rated as junk bonds," contrarian financier Marc Faber told the Australian Broadcasting Corp. three weeks ago. "I'm sure the U.S. government will eventually go bankrupt. Maybe not tomorrow, but as far as the eye can see, we will have deficits in the U.S. government, deficits of more than $1 trillion annually."

Faber's nickname isn't "Dr. Doom" for nothing. Rating agencies aren't quite ready to put Treasuries in the same category as General Motors paper or Argentine bonds. Low-interest yields even on long-term Treasuries prove that many investors continue to treat them as a "risk-free" haven. (When the price goes up, the yield goes down.)

But if the next president is as profligate as President Bush (he doubled the national debt in eight years) and doesn't do something about Medicare and Social Security, it will be harder than ever to get back on track.

"Of course, in the short term they're probably going to be too busy with the current economic situation to fix long-term programs," says Steven Hess, who follows U.S. debt for Moody's. "But at some point, somebody's going to have to come up with serious proposals on reforming these two programs for the long-term financial health of the federal government."

As it does for a person, a nation's credit rating says something about its honesty, wherewithal and potential. Debt scores and borrowing power closely track a country's influence.

Thanks to the bailout, American national debt is expected to balloon to 70 percent of the size of the economy. It hasn't been that large since the 1950s, when the country was weighed down with World War II debt.

And the official debt is dwarfed by off-balance-sheet liabilities for Social Security and Medicare, which Standard & Poor's calculates at more than $40 trillion in today's dollars over the next 75 years. The whole U.S. economy produced only $14 trillion in goods and services last year.

The bailout adds new pressure on America's debt grade, which has been a perfect "triple-A" for decades.

"None of this is positive for the rating on the U.S.," says Nikola G. Swann, a sovereign debt analyst with Standard & Poor's. "On the other hand, the United States has some unusual credit strengths."

Those include the country's flexible, diversified economy, low taxes compared with those of other nations and a stable political system.

But to capitalize on those strengths, Congress and the next president must act in the next four years. Reforming Medicare and fixing Social Security, which got almost no mention during the campaign, must be at the top of the list.

Neither S&P nor Moody's is ready to downgrade the United States of America. Don't forget however, that these were the guys who said it was OK to buy all those bum mortgage bonds.

Job 1 for the next president is fixing the balance sheet of the banks. Job 2 is fixing the balance sheet of the nation.

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