Thursday, August 26, 2010

United States - Waiting on a debt downgrade?

Update: September 20th, 2010.

According to the TreasuryDirect website, the total United States public debt outstanding has now reached a rather staggering $13,464,896,653,374.11. The interest expense for the first 11 months of fiscal 2010 is now $395,768,649,928.52. Only 22 countries in the world have GDPs that are greater than the annual amount of interest on the United States' public debt.

Original Posting

With Wednesday August 24th's announcement that Standard and Poor's Ratings Services had downgraded Ireland's sovereign debt by one notch from AA to AA minus on the eve of their 400 to 600 million euro debt offering, I thought it was time to take a look at American sovereign debt.

Back on August 17th, 2010, Moody's Investor Service announced that, while the United States debt is currently "stable" at a Triple-A rating, their sovereign debt and the sovereign debt of other major Western Nations particularly Great Britain, have moved closer to being downgraded. To quote the report, their ratings are currently "stable" but their "distance-to-downgrade" has substantially diminished in all cases. The United States was first assessed with a Triple-A rating back in 1949.

While this may seem unimportant to the average American, it is similar to having your personal creditworthiness found to be of concern by your local bank. As in the case of individuals, having a poorer credit rating will typically mean that lenders and investors will demand a higher return (interest rate) on their investments (loans) in that countries debt (in United States Treasuries or British Gilts) since the chances of repayment of both interest and principle are diminished. These higher interest rates add to a country's overall burden of debt which often result in tax increases or reduced spending or a combination of the two. If interest payments on the debt increase and a government is already running a large annual budget deficit, increasing amounts of interest debt will accumulate. The great fear is that deficits will become structural, that is, no matter how broadly and quickly an economy grows, growth in revenue never exceeds growth in deficits.

Sovereign debt downgrades are not without precedent. In May 2009, Moody's cut Japan's Aaa rating by 2 notches to Aa2 because of Japan's huge public debt burden which, at $9.7 trillion, is estimated to be 189% of the country's gross domestic product in 2009, making Japan the most indebted nation in the OECD. In mid-June 2010, Moody's slashed Greece's sovereign debt ratings from A3 to Ba1, essentially relegating it to junk status. At the end of June, Moody's also threatened to cut Spain's Aaa rating by one or two notches because of slow economic growth; Spain's rating had already been cut two notches by Standard and Poor's Ratings Services.

Let's take a look at the United States debt situation. Fortunately, the United States Department of the Treasury has a website for the Bureau of the Public Debt (BPD) which has a wealth (pardon the rather weak pun) of information regarding the debt situation in the United States. One of the great things they have on their website is a button that you can click on showing the U.S. public debt to the penny. When I clicked on it on Wednesday while I was working on this posting, it showed that the debt stood at $13,371,301,700,295.28 on August 24th, 2010. You can also search the debt by date to see how much it is growing; records are available back to January 1993 when, incidentally, the total public debt stood at $4,167.872,986,583.67. As well, you can get monthly schedules of the debt, how much debt is held by the American public and how much interest is being paid on the debt. In fact, the annual interest being paid on the debt is larger than the individual GDP numbers for many countries including Sweden, Norway, Saudi Arabia and Taiwan.

In looking through the Financial Audit completed by the BPD for the 2008 and 2009 fiscal years, I found the following information:

Here's another interesting chart showing just how much interest is being paid on the public debt on an annual basis.

To me, the most interesting part of the website is the donations section. You can actually make a contribution to reduce the public debt here. What I found particularly interesting about this was that donations could be made by credit card. Is it ironic that we can use credit to pay off credit or is it just me that finds it amusing?

According to this website, there are 576 million credit cards in circulation in the United States as of the end of 2009. Let's assume that we divide the total United States public debt evenly among all those credit cards. Each of those credit cards would have to assume a $23,189 balance just to pay off the public debt. How many of those 576 million credit cards does your family hold and what would your share be? As it stands now, on a per capita basis, each of the 307,006,550 American residents would have to pay $43,555 just to pay off the outstanding Federal debt with or without credit cards.

Sobering, isn't it? On the upside, think of the travel miles and other loyalty points we'd all get if we paid off all American public debt using our personal credit cards!


While I can't speak to it's accuracy, I used the CIA World Factbook for consistency when comparing debt to GDP ratios. Unfortunately, with so many sources available, economic statistics vary widely with the source used. I felt that at least I was being consistent by using the same source throughout this posting. For specific United States debt data, I used the Bureau of Public Debt website since it is obviously the most accurate.


  1. Whatever, at this point it's just stating the obvious.

    The market has already passed judgment. There are a host of US Corporations rated AAA with lower yields than the US Government.

    As usual, the rating agencies are behind the curve.

  2. Yes, I may be stating the obvious but it's always amazing how the public is not aware of the obvious because it's not covered by the mainstream media. If it is covered, the data is scattered far and wide; I like assembling the pieces to put the whole story together, especially in the case of government finances.

  3. Plain and simple, it's money drunkenness. Governments are hiding behind Keynesian economic policies taken to perverse levels. The Austrian school of economics is a much more sustainable view, and it says these behaviors will end badly. Every fiat currency in history ends up in the same place, back to the forest floor.

  4. What about the 'off balance sheet debt'? If I live in my brother's house and 'promise' to pay him $100/month, that is a debt. While it is not money that I have borrowed, it is money owed. You are only looking at money borrowed. Money owed includes 'promises' to ensure Social Security and Medicare benefits, to ensure the solvency of public pensions, to ensure freedom and protection from tyranny worldwide, and other implicitly guaranteed institutions (that now include Fannie Mae, General Motors, AIG....). When you include the expected value of these 'off balance sheet promises' the actual total debt is more than twice your number. Not only have we borrowed drunkenly, we've made even larger drunken promises.