Updated April 2018
A business story that got very little traction in the United States provides us with some insight about how Washington's endless debt accrual could eventually result in significant changes to what it will cost the federal government to service its growing debt problem. In large part, the accumulation of federal debt since the Great Recession can be laid at the feet of the Federal Reserve because their near-zero interest rate policy and endless "printing" of money has given Congress a green light when it comes to adding to America's debt burden.
A business story that got very little traction in the United States provides us with some insight about how Washington's endless debt accrual could eventually result in significant changes to what it will cost the federal government to service its growing debt problem. In large part, the accumulation of federal debt since the Great Recession can be laid at the feet of the Federal Reserve because their near-zero interest rate policy and endless "printing" of money has given Congress a green light when it comes to adding to America's debt burden.
Let's look at a bit of background
first. Dagong
Global Credit Rating Company was founded in 1994 and was the first
non-western ratings agency to provide the world with national credit risk
information. It is the biggest national brand rating agency in China and
is the only national credit rating agency that "obtains the joint approval
of the People's Bank of China and the State Economic and Trade
Commission."
Here is a summary on how Dagong's
rating methodology works:
"Dagong’s methodology
exerts significant influence in of the international credit rating sector.
Dagong’s rating methodology is based on Dagon’s credit rating theories.
Different from the western rating methodology, which centers on default rate
and only emphasizes validating instead of warning, and also distinguished from
all the other rating methods, Dagong’s
rating methodology measures the degree of issuer’s debt repayment safety and
applies the deviation of issuer’s debt repayment source against its wealth creation
capability, which reveals the issuer’s real risk, on the basis of complete and
rigorous inner logic as well as credit risk warning capability." (my
bold)
In other words, Dagong looks at a nation's capacity to repay its own debt.
Next, let's look at the major foreign holders of
U.S. Treasury securities:
As you can see, at $1.168 trillion,
Mainland China is still the largest foreign holder of United States debt
instruments.
Here is the breakdown of the total
public debt for the month
of December 2017 from
the Treasury Department:
Mainland China currently holds
8.1 percent of the $14.480 trillion in outstanding marketable federal
debt.
Now, let's look at what Dagong
has to say about the current
United States federal debt situation:
"Dagong Global Credit
Rating Co., Ltd. (“Dagong”) has decided to downgrade both the local and foreign
currency sovereign credit ratings of the United States of America (hereinafter
referred to as "the United States" or “the US”) from A- to BBB +, and
each with a negative outlook. The
perennial negative impact of the superstructure on the economic base has
continued to deteriorate the debt repayment sources of the federal government,
and this trend will be further exacerbated by the government's massive tax
cuts. The increasing reliance on the debt-driven mode of economic development
will continue to erode the solvency of the federal government." (my bold)
Dagong's
long-term credit rating scale is
as follows:
Dagong's rating for U.S. debt now
suggests that "default risk is moderate" and that the debt is
serviceable in normal business and economic conditions, however, the risk of
default is "more likely to exist" in adverse economic conditions.
Dagong's reasons for the downgrade
are as follows:
1.) Deficiencies in the
current US political ecology make it difficult for the efficient administration
of the federal government, so the national economic development derails from
the right track. Under the
political ecology which is built by the factional rivalries, factional
interests are prioritized, and it is hard for the government to focus on the
management of the national economy and social development. Therefore, the national economy is
highly debt-driven. Nevertheless, the government did not discover from the
financial crises that it is the debt-driven mode of economic development that
has hindered the country from making ends meet. (my bold)
2.) The distorted credit
ecology that violates the law of value leads to the abnormal solvency of the
federal government. Capital’s desire for profits makes the financial sectors of
the United States strive for more profits through continuous expansion of the
chain of credit transactions by designing capital products and trading
structures, and the virtual value-added model of capital self-circulation that
runs out of the real economy provides living space for the ever-blooming debt
bubble of the federal government.
3.) Massive tax cuts
directly reduce the federal government's sources of debt repayment, therefore
further weakens the base of government's debt repayment. The tax cuts act
implemented from 2018 did not attack the root cause of the unsustainable
debt-driven economy of the US, so it is projected that the US economy growths
only 2.3% in 2018, and would grow even more slowly in the years after. Besides,
fiscal revenue of the federal government will keep declining due to the tax
cuts, so it is projected that the fiscal revenue to GDP ratio will fall to
14.0% in 2022, a 3.3 percentage points down from that of 2017.
4.) Using the rising debt
to make up for the fiscal gap brought by the tax cuts will inevitably increase
the credit risk of the federal government. The financial gap and the pressure
to repay maturing debts raise the financing needs of the federal government. It
is estimated that ratio of fiscal revenue-to-debt of the federal government
will be 14.9% and 14.2% in 2018 and 2019 respectively, and the ratio will
deteriorate to 12.1% in 2022. The government will then have to raise the debt
ceiling frequently. In addition, the government’s realizable assets-to-debt
ratio is merely 7.3% in 2017.
The credit warning closes with the
observation that Washington's lack of solvency will be the "detonator of
the next financial crisis" and that the imbalance between the sources of
debt repayment (i.e. tax revenues) and liabilities makes the federal government
the weak link in the debt situation. As well, Dagong makes the following
key point:
"Taking the advantage of
its right to print money, the US strives to maintain its solvency by purchasing
treasuries with newly-printed dollars, which, in itself, is a debt
crisis."
The supply of money as measured using MZM has increased by 88 percent since the beginning of the Great Recession, showing us how desperate the Fed is to keep the economy firing.
....this:
...and this (noting that it excludes intragovernmental debt which is currently sitting at $6.012 trillion):
...along with the fact that the Tax
Cuts and Jobs Act is expected to add an additional $1.4 trillion to the federal
debt over the next decade, one can understand why Dagong has downgraded the
creditworthiness of America's federal debt, a subject that you are unlikely to
hear about from your representative in Congress let alone the U.S. mainstream media. And, of course, no one will blame the Federal Reserve and their long-term experiment with unreasonably low interest rates on Treasuries.