EconomyWatch Exclusive: FOX Business Expert on the US Debt Crisis

 

What does everyone need to know about the debt crisis and how can you beat the bad economy? FOX Business Network stocks editor and reporter Elizabeth MacDonald has been closely monitoring the debt crisis currently enveloping the United States. It’s an issue that extends beyond the US and one with many complexities, MacDonald takes time to weigh in and break it down in this exclusive interview.

Q. What are 5 things every American needs to know about the debt crisis?

 

 

What does everyone need to know about the debt crisis and how can you beat the bad economy? FOX Business Network stocks editor and reporter Elizabeth MacDonald has been closely monitoring the debt crisis currently enveloping the United States. It’s an issue that extends beyond the US and one with many complexities, MacDonald takes time to weigh in and break it down in this exclusive interview.

Q. What are 5 things every American needs to know about the debt crisis?

A. The debt deal doesn’t fix the long-term trajectory of U.S. debt, which is growing as the baby boomers retire and Social Security and Medicare come under duress. Also Medicaid is handling half the uninsured via health reform, so there’s more debt there too coming.

Both Moody’s Investors Service and Standard & Poor’s  want a credible plan on long term U.S. debt reduction on the order of at least $4 trillion.

S&P has been notably pointed in its criticisms. [quote]John Chambers, its head of sovereign ratings, said on a client conference call late last week that $4 trillion in cuts is just “a good start;” it wants more to stabilize the United States’ annual budget deficit-to-GDP ratio, now at more than 9%. The International Monetary Fund has said that a healthy ratio here is 7.5%.[/quote]

Chambers also indicated that the “acrimonious” fights in Washington were the most “detrimental” to the U.S. credit rating outlook. The plan’s new three-step process under which the government would raise the debt ceiling may risk more uncertainty and infighting, which S&P has already frowned on.

S&P was first out of the ratings agencies to say that the U.S. had a one in three risk of a downgrade, after stating earlier this year the odds of a downgrade were 50-50. It said it put the U.S. on a fast-track the possible downgrade because of the fights in D.C.

Changes in ratings are usually lagging indicators; they usually follow, rather than cause, economic chaos. Chambers noted that the threat to downgrade the U.S. rating didn’t come from “external” shocks, but were “self-inflicted” by the partisan gridlock and disruptive fighting in D.C.

Q. There are many reasons why a US credit rating downgrade is bad for the country, but can you tell me any reasons why a downgrade wouldn’t be so bad?

A. A downgrade would be bad, no question. Outside the deflationary environment we are in now, yields on Treasury notes and bonds would spike higher, up by at least a percentage point or more. And that means borrowing costs would go up.

But the ten year just broke down to 2.72% in trading today. That’s deflation, and a flight to safety. Eurozone bonds remain dubious, and Asia debt markets are largely illiquid. The US debt market is the biggest and most transparent. Also, the issue now is, the U.S. can print its own money, pure and simple, which supports its bond borrowing at teaser rates.

Q. Will raising the debt ceiling only buy time until the roof eventually comes down – or is it a realistic solution to America’s debt crisis?

A. Having gone through the exercises that brought us to the brink of a debt deadline, questions are being raised over whether it is even worth having a debt limit. Nothing in the Constitution says we should have one, and it hasn’t ever stopped the government from spending money, since the limit is always raised. Moody’s Investor Services, in threatening a downgrade to the U.S.’s triple-A, said this: “We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty.” Translation: Moody’s is asking the U.S. government to toss the limit, and instead have a framework based on the size of the total budget to keep borrowing in check. Can that work?

But that wouldn’t work in an environment where the White House has called the Republicans’ “Cut, Cap and Balance” bill arbitrary, in a statement saying “neither setting arbitrary spending levels nor amending the Constitution is necessary to restore fiscal responsibility.”

Problem is, DC has always treated the debt ceiling as an “arbitrary spending level,” raising it about 100 times since 1939. This is D.C. political dysfunction in high definition, which looks more like the fighting in Italy with each passing day, because as baby boomers retire en masse and the government cashes out its bonds in the Social Security trust funds, the ensuing bond market melee from the flood of all those securities could spike yields higher and make US Treasuries look more and more like emerging market debt.

So again why go through the trouble? Because as little that got done this go around, even less would have been accomplished without a debt limit. The problem is, the U.S. historically has blunted the twin blade of the scissors to cut the deficit, a debt ceiling and a balanced budget amendment to the Constitution, which takes two-thirds of Congress and three-quarters of the states to pass. Congress has consistently been unable to pass a balanced budget amendment.

So that leaves the debt ceiling as just one blade of the scissors. And when history repeats itself, things get more expensive, as the history of the debt ceiling fights proves.

Q. How can you beat the bad economy?

A. Unfortunately, you can’t beat it. You have to sit tight and weather the fainting spells the markets will go through until this problem gets settled, which looks to be years away.

Find out more about Elizabeth MacDonald