Martin D Weiss of Weiss Ratings announced through his market newsletter Money and Markets that he is assigning a rating of “C” to US debt, which is two levels above junk. The US is 33rd among the 47 sovereigns covered by Weiss Ratings, above Ireland, Greece and Portugal; but below China, the Philippines, Indonesia, and even Mexico.
Weiss has not wavered from his view that the US is traveling down the path of insolvency, and ultimately default, on its sovereign obligations. It’s hard to argue with the premise. Deficits of a trillion or more dollars per year seem politically inevitable, adding more and more accumulated debt each second. At some point, the debt, which is already roughly 80% of gross domestic product, will become unmanageable. Things that can’t continue indefinitely don’t, and the US cannot continue to accrue deficits and accumulate debt indefinitely. At some point, credit will run dry.
Yet the official debt and deficit numbers hardly capture the true precariousness of the US fiscal situation. Never minding Medicare and Social Security, the two entitlement behemoths that must be reformed before there can be any legitimate hope of balancing the budget, since the financial crisis, the US has explicitly or implicitly become the guarantor of the debts for a huge swath of the economy. Banks, mortgage companies, car finance companies and even car companies owe their survival and existence to their US backing. Anyone that believes the FDIC operates to limit government liability for bank deposits is foolhardy, and bank deposits total about $5 trillion. Likewise the obligations of the former government sponsored enterprises that are now under government conservatorship. There’s another $5 trillion or so. Likewise the junk paper sitting on the Fed’s balance sheet that helped the economy ride out the hangover caused by its Bacchanalian credit orgy of the aughts. That’s about $2.7 trillion. Let’s say losses on all of these obligations only come to about half during the coming economic decline. That’s another $6 or so trillion that the US government doesn’t have.
The mechanism for default will not involve simply failing to pay. No, all US dollar-denominated obligations will be paid in full. That’s the beauty of borrowing money in the same currency as you have a monopoly on printing. Default will most likely come through dollar devaluation, as Weiss warns. Another word for devaluation is inflation, such as we are even now seeing in commodities markets worldwide.
Weiss is not just some crank that gets his prognostications correct like a clock on the wall is correct twice a day. He called the financial crisis before it happened, along the way emphasizing the core weaknesses of the US and Western Europe financial system. I’m sure market professional would consider him something of a perma-bear, and from a long-term perspective, I suppose he is. But I don’t trade short-term. For a little guy like me, I think trying to game the market short-term is about as futile as trying to hide from an F5 tornado. I want to know and understand big trends (somewhat unlike the inappropriately named The Big Picture blog, which is fine, but is more about minutiae than the big picture). And the big picture reality is that nothing really has changed between now and two years ago except that the US has assumed liability for the debt underpinning vast swaths of the economy. Private losses have been socialized. The moral hazard of risk indemnification means that even now gargantuan risks are accumulating. But the next leg down, the US government will not be able to indemnify the losses without destroying what little of its fiscal credibility that remains.
Weiss will be mostly ignored, when he’s not being ridiculed, by mainstream financial punditry. But the same principle that purports to justify taking action over anthropogenic global warming–that the risk of not doing anything is huge, so even if there’s no certainty about the problem, something must be done–is the same that should drive concerns over the near-future fiscal condition of these United States. It may be that the US works its way out of this mess. But it may also be (and more likely is, in my view) that it doesn’t. The repercussions will be financially catastrophic for those that don’t take measures to protect themselves. Incidentally the same smooth, “in the know” financial pundits that ridicule Weiss will be the ones that, if asked at a cocktail party about global warming, would bemoan the Neanderthal deniers, and how they are too stupid to understand the riskiness of the situation. Which shows that the source of their evaluation, both financial and regards AGW, is not evidence, but the opinions of others.
I think Weiss is correct to warn of the fiscal dangers and challenges faced by the US. I can do the math, and I can discount the political calculus. Frankly, I think he’s right. The future is not looking bright.