America in Trouble: Social Security, Credit Ratings

There are endless America #1-style cheerleaders out there who doubt America is in decline and doubt the seriousness of its fiscal woes. Deficits don't matter, right? Unfortunately, IR/IPE stalwart Joseph Nye may be leaning in that general direction. In a recent Korea Times op-ed, Nye offers the following [you may want to cue Brooks & Dunn or similar Bushite favourites before reading further]:

First, the U.S. is not in decline. Americans and others have been predicting decline regularly over the years: after the Soviets launched Sputnik in 1957; again when Nixon closed the gold window in 1971; and when the American rust-belt economy seemed to be overtaken by Japanese manufacturers in the 1980s.

But when one looks at the underlying strength of the American economy, it is not surprising that the World Economic Forum ranks the U.S. second (just behind Switzerland) among the most competitive, while China ranks some 30 places below...True, if China dumped its dollars on world markets, it could bring the American economy to its knees, but in doing so it would bring itself to its ankles.

Dem's fightin' words, Professor Nye. Well, let me tell you why America is in decline now and not then, and it's largely down to demographics. There's no mystery here: American politicians are busy plying elderly citizens who actually bother to vote with goodies like health care, retirement benefits, and other sweeteners, while the next generation of Americans who don't bother to vote can't even get an education as states go belly up. As I've said before, the US and its expenditures are backward-looking and not the other way around as it splurges on retirees and leaves its future penniless in the finest American tradition.

Actually, you don't need to look far for further signs of American decline without bothering with China. I found the following from the Yahoo! front page, in fact. It is generally understood that Social Security's fiscal health is "better" than that of Medicare or Medicaid. Still, it's expected that Social Security payouts will exceed disbursements this year and only get worse from here on in. Time to draw on the "piggy bank," right? As many know, the federal government has been busy raiding Social Security to pay for fiscal shortfalls elsewhere for many, many years. End result: there's nothing left--time to borrow from the real owners of America--the Chinese:

The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration. It's time to start cashing them in. For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year. Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more.

Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors. In return, the Treasury Department issued a stack of IOUs — in the form of Treasury bonds — which are kept in a nondescript office building just down the street from Parkersburg's municipal offices.

Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn't be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.

Well, er, yes, America #1--especially in deficits. But wait, it gets even worse. Credit ratings have received a fairly well-deserved beating due to credit rating shenanigans during the credit crisis when they slapped AAA labels on all sorts of toxic waste. Now, Moodys has joined Fitch's in recognizing that, gee, America ain't doing too good. They may be on the thick and dishonest side, but hey, even these guys eventually know a clunker when they see one:

Moody’s Investor Service, the credit rating agency, will fire a warning shot at the US on Monday, saying that unless the country gets public finances into better shape than the Obama administration projects there would be “downward pressure” on its triple A credit rating. Examining the administration’s outlook for the federal budget deficit, the agency said: “If such a trajectory were to materialise, there would at some point be downward pressure on the triple A rating of the federal government.”

It projects that the federal borrowing is so high that the interest payments on government debt will grow to more than 15 per cent of government revenues, about the same by the end of the decade as the previous 1980s peak. This time the servicing burden would be harder to reverse, however, because it would not be caused by high interest rates but by high debt levels.

FT Alphaville mentions the following graphic depicting the future trajectory of America's gut-busting deficits and the potential to reverse them, which declines as it accumulates more and more and more IOUs. You can download the entire Moody's Aaa Sovereign Monitor from Zero Hedge (catchy title that):

If only someone could put the US out of its misery. Call it fiscal euthanasia. I generally don't think a US downgrade is imminent because Washington can apply pressure on the rating agencies. Insofar as it alone grants them a license to rate US debt, it would be easy to threaten disenfranchisement, effectively putting them out of the business of rating the vast majority of dollar-denominated assets [1, 2, 3]. So, while I wholeheartedly believe US sovereign debt is little better than the subprime junk credit rating agencies also deemed to be AAA, calling a spade a spade may have to wait. But deficits don't matter, right?