[INDEX |
NATIONAL
|
WORLD
|
PERSPECTIVE
|
COLUMNS
|
MONEY
|
ENTERTAINMENT
|
HEALTH
|
TECH
|
LETTERS
|
SUBSCRIBE]
FinalCall.com News
Business & Money
Are U.S. Treasuries Headed For Junk Bond Status?
By Cedric Muhammad
-Guest Columnist-
Updated Feb 4, 2008 - 12:52:00 PM
“And every nation has a term; so when its term comes, they cannot remain behind the least while, nor can they precede (it).” --Holy Qur’an 7: 34
“For lack of guidance a nation falls, but many advisers make victory sure.” --Proverbs 11:14 (New International Version)
“Moreover he called for a famine upon the land: he brake the whole staff of bread. He sent a man before them, even Joseph, who was sold for a servant: Whose feet they hurt with fetters: he was laid in iron: Until the time that his word came: the word of the LORD tried him. The king sent and loosed him; even the ruler of the people, and let him go free. He made him lord of his house, and ruler of all his substance: To bind his princes at his pleasure; and teach his senators wisdom.” --Psalms 105:16-22 (King James Version)
What is the truth of United States Senator George Voinovich’s (R-Ohio) statement, made on the floor of the Senate on October 24, 2007: “According to S&P, U.S. Treasuries will lose their triple-A credit rating in 2012 because of the government’s deteriorating long-term fiscal position?”
To learn that, I contacted both the office of Senator Voinovich and the influential ratings agency, Standard and Poor’s (S&P). One can learn more about Standard & Poor’s by visiting their website at: http://www2.standardandpoors.com/.
The office of Senator Voinovich told me that the statement was in fact made, as the Congressional Record indicates, and as was reported, and that it was based upon a reading of a report published by Standard & Poor’s about the impact that America’s aging population—and the Medicare, Medicaid, and Social Security benefits promised and owed to it—would have on government solvency.
Government solvency refers to the ability of a government that has borrowed money to pay back that obligation or debt as scheduled, or when demanded by a creditor (the one who has loaned the government money). A government is said to be insolvent when it cannot pay back a debt in its entirety or is unable to even make payments related to the interest it is being charged on the loan.
To personalize it a bit, for clarity sake, we are insolvent as individuals when we can’t pay our bills or money we owe (smile).
In order to verify the existence of the report Senator Voinovich’s staff made reference to, and in order to determine the accuracy of its interpretation of that report, if it existed, I contacted Standard & Poor’s. Here is the question I asked Standard & Poor’s:
I am writing to learn the veracity and the empirical source of Senator Voinovich’s reference to a S&P determination in his October 24, 2007 floor speech. In that speech made on the floor of the United States’ Senate he said: “According to S&P, U.S. Treasuries will lose their triple-A credit rating in 2012 because of the government’s deteriorating long-term fiscal position. What kind of global economic turmoil awaits us five years from now when the U.S. government is considered just as risky as a typical corporation? And what economic catastrophe awaits our children and grandchildren in 2025, when Standard & Poor’s projects that U.S. Treasuries will be classified as junk bonds?” Could you kindly direct me to any available data, statements, research or releases that relate to this statement and your organization?
Here is the answer I received from Standard and Poor’s:
“...please find attached a report which we’ve been publishing annually since 2002. The report reviews the implications of demographic change on sovereign ratings across the developed world. As you’ll note in the report, the analysis in no way constitutes a forecast of ratings trajectories by S&P—it merely states that, if no countervailing structural and fiscal reforms were undertaken, deficits would increase to levels that, sooner or later would become incommensurate with today’s ratings—and by a large margin. The simulation illustrates underlying tendencies of what could happen in the unlikely event of complete government complacency. The message is unambiguous: Without strong and sustained reforms, the high credit ratings on these governments could fall due to demographic spending pressures, starting in the 2010s.
In the case of the U.S.’s ‘AAA’ standing, after 2015 it would fall into the ‘A’ category, and would then drop further into the ‘BBB’ category by 2020. In 2025, U.S. fiscal indicators would have weakened to an extent that they would be more typical of performances currently associated with speculative-grade sovereigns.”
Attached in the response I received from S&P was a report, “Global Graying Country Report: United States Of America,” which indicated that if the current state of American tax and spending policy remained the same and did not improve, the burden of the estimated 78 million individuals commonly known as Baby Boomers on America’s public finances would be so great that it would cause a ‘fiscal deteoriate’ ”of a “magnitude that is not compatible with the current ‘AAA’ sovereign rating of the United States.” The report then goes on to describe how Standard & Poor’s determines (or “derives”) a “hypothetical sovereign rating” that might arise in the future.
Standard & Poor’s assigns bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, D.
AAA or Triple-A is a rating given to the highest quality debt or bonds, while D is the poorest quality and refers to a debt that is in payment default.
Bonds like American government securities are generally placed into two broad categories—“investment grade” bonds and “junk” bonds. Investment grade bonds are the top four categories: AAA, AA, A, BBB. And junk grade bonds are those below BBB.
So, what is my conclusion?
If you take what Senator Voinovich says (“According to S&P, U.S. Treasuries will lose their triple-A credit rating in 2012 because of the government’s deteriorating long-term fiscal position. What kind of global economic turmoil awaits us five years from now when the U.S. government is considered just as risky as a typical corporation? And what economic catastrophe awaits our children and grandchildren in 2025, when Standard & Poor’s projects that U.S. Treasuries will be classified as junk bonds?”) and compare it to the report sent to me by S&P, and what S&P told me (“In the case of the U.S.’s ‘AAA’ standing, after 2015 it would fall into the ‘A’ category, and would then drop further into the ‘BBB’ category by 2020. In 2025, U.S. fiscal indicators would have weakened to an extent that they would be more typical of performances currently associated with speculative-grade sovereigns.”) I come to the conclusion that Senator Voinovich is 100 percent accurate except for his statement that Standard & Poor’s is the one definitively concluding that “...U.S. Treasuries will lose their triple-A credit rating.”
Standard & Poor’s is not outright stating that will happen, rather, it is indicating that such an outome is possible in a hypothetical projection or simulation it is making, if conditions continue exactly as they are.
“Government complacency,” as S&P refers to it, cannot be ruled out as impossible, however. As an example, I have consistently pointed out in my writings that no major candidate for President that I am aware of, has forthrightly dealt with this problem or presented a realistic solution to deal with it.
To me that is more than complacency, that is denial and hiding the truth.
The fact that it is possible that U.S. Securities could go from the highest credit rating to one of the worst in a matter of a decade or so, if government public finances and the commitments made to the Baby Boomers are not addressed, is one of the reasons why the country’s top government accountants, Mr. David M. Walker is openly, desperately, and angrily stating that America is facing a “fiscal tsunami,” and that “the federal government is on a ‘burning platform.’”
Are we spiritually, economically, politically and culturally preparing as we should for such a dramatic and life-and-death scenario?
I don’t think so.
And that is why I am practically begging us to thoroughly study and discuss with one another The Fall of America by the Honorable Elijah Muhammad and A Torchlight For America by the Honorable Minister Louis Farrakhan.
Did you know that the worst drought in 114-years of record keeping is still underway in the Southeastern region of the United States?
And did you know that the Honorable Elijah Muhammad said that the worst famine would one day be experienced in the United States of America?
He indicated how this would happen, what effect it would have on the United States of America, and where this was written in both the Bible and Holy Qur’an.
The Honorable Minister Louis Farrakhan continues to represent his position, the solution and the best program for the entire American electorate to follow to prepare for such a horrible day.
Read the recent Associated Press article, “South’s drought a threat to nuclear power plants.”
(Cedric Muhammad is a business and political economist who advises entrepreneurs and small businesses through his company, CM Cap. His weekly “Cedric Muhammad and Black Coffee Program” can be viewed every Wednesday from 12 p.m. to 4 p.m. EST at The Black Coffee Channel, http://www.blackcoffeechannel.com.)
