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Egan-Jones downgrades U.S. debt

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Norm Leahy
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by Norm Leahy

A less well-known ratings agency, Egan-Jones, has downgraded the federal government’s debt from AAA to AA+. The report explaining why can be found here. If you’re not a client, Zero Hedge has the press release, complete with charts, which gives you a solid understanding of the report’s contents:

We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100% compared to Canada’s 35%. Nonetheless, since the US’s debt is denominated in dollars, a hard default is unlikely.

So the mummery behind the debt ceiling talks has little to do with the government’s fundamentals, which are only getting worse. This additional item is worth remembering as doomsday (or at least doomsday as it is preached in the press) approaches:

Egan-Jones does not view a country’s ability to print its own currency as a guarantee against default. Additionally, Egan-Jones generally views cases of excessive currency devaluation as a de facto default.

Based upon that last bit, one could argue that the Federal Reserve’s mass printing of money over the last several years has effectively rendered the United States a larger version of Zimbabwe.

(Cross posted at Score Radio Network)

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5 responses to “Egan-Jones downgrades U.S. debt”

  1. James Bacon Avatar
    James Bacon

    I hear/read that a lot — the U.S. can print its own currency, therefore it can’t default. Note Egan-Jones’ distinction between a “hard” default and what is presumably a “soft” default. A hard default is when a country can’t float its debt. A soft default is Zimbabwe.

    Will the U.S. turn into Zimbabwe? Probably not. We still raise enough taxes to finance 60% of our spending. In Zimbabwe (I’m guessing), the number was more like 10% or 20%. The good news is, we won’t ever have a bazillion-percent rate of inflation. But we could, in the event of a soft default, have a 100% annual rate of inflation.

  2. Peter Galuszka Avatar
    Peter Galuszka

    Who wrote this post?

    PG

  3. Norm Leahy Avatar
    Norm Leahy

    I did — “I” being Norm Leahy

  4. Peter Galuszka Avatar
    Peter Galuszka

    Norm,
    You may want to put your byline at the top while Jim fixes the problem.

    Thanks,
    Peter

  5. larryg Avatar
    larryg

    I keep repeating this. When you take a closer look at our revenues from taxes – individual and corporate – we only take in about 1.3 trillion dollars but we are spending 1.5 trillion ore than we are taking in – in revenues.

    The problem is that many budget representations that are presented INCLUDE the almost trillion dollars that FICA brings in – but that money is not available for anything other than social security, disability insurance and Medicare Part A.

    so when the budget info present shows us taking in 2.1 trillion and spending 3.6 trillion – it does not deal with the fact that almost a trillion of 2.1 trillion “revenue” is not really “revenue” that can be spent on anything other than entitlements.

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