Can Creditors Seize My Savings Bonds

U.S. Government Merits Junk Debt Rating: Laurence Kotlikoff

Politicians and investors say Standard & Poor’s made a mistake when it cut the U.S.’s credit rating from AAA to AA+. I agree. I wonder why S&P didn’t take it all the way down to CCC.

The country’s political leaders, from President Barack Obama on down, are alternately decrying S&P’s hubris and blaming their opponents. Big investors who hold lots of Treasuries are also on S&P’s case. Warren Buffett said the downgrade “doesn’t make sense,” that Treasuries are still AAA in Omaha, Nebraska , and that S&P should rate U.S. debt AAAA. If AA+ means very low credit risk and AAA means no credit risk, I guess AAAA would signify negative credit risk.

My question, though, is why U.S. government bonds carry a rating any better than CCC, which is well into junk territory. Such a grading, according to S&P, implies the debtor is “currently vulnerable and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.”

Sounds right to me. Our economy is in horrible shape. Unemployment is stuck at more than 9 percent, real per-capita output hasn’t budged in six years, the national savings rate is zero, and domestic investment is a miserable 4 percent of national income. With 78 million baby boomers heading into retirement, we have made no provision to pay their full annual Social Security, Medicare and Medicaid benefits, which will average $40,000 in today’s dollars. We are spending more than the next 13 countries combined on defense. The U.S. is running enormous budget deficits, and our tax system is collecting the least revenue per dollar of output since World War II.

True, bad economic conditions don’t necessarily translate into bad credit. Credit risk formally refers to the likelihood of actual default -- that is, not paying debts precisely when they are owed. Even if our economy continues to falter, the government collects enough taxes to do this job for decades, provided it treats its bondholders as senior creditors and pays them before others, like Social Security beneficiaries and soldiers.

There’s another reason the U.S. can always stave off default. The Federal Reserve can simply print dollars to make bond payments. Unlike Greece -- which relies on the European Central Bank for its supply of euros -- our government controls its printing press. The Fed could even print $10.3 trillion and buy up every single Treasury bill and bond held by the public and foreigners. There would be no debt outstanding on which to default. The Chinese could no longer claim we are “addicted to debt.

Why The Federal Budget is Not Your Household Budget « The Foregone ...

Well, we made it through the debt ceiling. Sort of . There was a large budget cut (make no mistake, 1 trillion dollars is a lot of money), but small in the overall scope of things. Is our debt long-term solvent? No, not by any means. Is right now the time to make it so? Most all economists assert absolutely not . So, a lot of the plans proposed by moderates in the U.S. Congress have been centering on plans that make short-term deficit spending now, while reducing the overall cost curve and lowering deficits in the next 5 or so years, after the recession has passed.

All that said, I’ve seen this quote by Dave Ramsey make some headlines, and thought it worth discussing:

The quote is, for all intents and purposes, mathematically correct, but insinuates a misleading principle. That principle is this: that federal budget is like, and should be compared to, our personal household budget. The argument goes that the U.S. government should manage its debt and budget like you or I do.

The argument has emotional appeal, for sure – with money being tight, and the middle class squeezed more than ever, why shouldn’t government cut back? Why shouldn’t we reduce the level of services (an important thing to remember is “government spending” is, in essence, public services) just like I’m reducing the amount I spend? It makes sense emotionally. Does it logically?

Not really. Here I’ll lay out a few reasons why the argument, when under scrutiny, doesn’t hold water.

1. Families Don’t Issue Their Own Currency

If my family was in debt, and I was the same as the federal government, I then plausibly could just call up my nephew Mr. Treasury, print off the exact amount of money I was in debt for, and pay it off. Secondly, all government IOUs are accepted as payment; it usually spends by crediting bank deposits, then cash, then Treasury bonds. So, if I were the government, I could just issue a Shaun bond, and pay off my debt that way. Unfortunately, I can’t.

2. Inflation Drives Affordability

If you and I run out of money, we simply stop spending. We are “revenue constrained” in our spending personally – meaning that we can only spend what we take in. The federal government is not backed by gold, or another barterable item, but by credit. What does this mean? This means, since 1971, when we moved off of the gold standard, the federal government no longer had to convert dollars to gold. Which means the federal government can print off as much money as it likes, without being revenue constrained.

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