Congress is supposedly scrambling to reach an agreement to raise the debt ceiling. The Treasury Secretary says we have until August to overcome the typical Washington gridlock, but the agencies that assign the nation’s credit rating beg to differ. Trying their patience isn’t in our best interest.
Secretary of the Treasury Tim Geithner says he can play games to keep the bills paid until early August, but then he needs the national debt ceiling raised in order to avoid missing a payment. Lawmakers have supposedly been working on the issue for several weeks now, but there hasn’t been any substantial progress. In fact, Vice-President Biden, who was initially tapped to handle the negotiations, seemed to concede this week that the two sides are at an impasse. President Obama appears ready to take up the task in earnest next week.
I continue to believe this is largely a sideshow. It’s political pandering at its best with very little substantive progress. It’s not much of a surprise though. It’s one of the reasons we changed the investment theme to a “tug of war” in early May.
I expect the leaders of both parties will move towards a resolution rather quickly, even if it is only a short-term deal to pay the pending bills. Be warned that shortly after the ordeal is settled we’ll likely be subject to some politician posturing to take credit for having championed the cause of hard working, middle class America. Groan.
The consequences for continuing the bickering and failing to reach a deal are severe. In early June, Moody’s, one of the leading rating agencies, released a statement suggesting they review the nation’s credit with a stated bias of lowering the rating if Congress wasn’t able to reach a deal to raise the ceiling by mid-July. Most heard the wake-up call, but dismissed it as a largely irrelevant threat.
I’m not quick to dismiss the thought of a downgrade and I’m even less interested in having the rating agencies take another look at our books. As if being the largest debtor nation in the history of the world isn’t enough, the agencies also factor in the rate at which the debt is growing and the perceived ability/willingness of a country to change its path. It’s fair to say we don’t want to broach either subject if we can avoid it.
Warranted or not, the AAA rating is saving us a few bucks. We’re issuing loads of unsustainable debt at ridiculously low interest rates. If you lose the AAA rating, the interest rates go up immediately. Suddenly far more money is spent servicing the interest on the debt, thus making less money available for current expenses. Then taxes are raised. It’s just not pretty.
A downgrade of the credit rating due to Congress’ failure to raise the debt ceiling or enact other meaningful reform isn’t inevitable. There’s ample opportunity to make relatively painless adjustments and chart a new course. The question is if the American voters can recognize the government has overpromised and support politicians to make the necessary cuts. If so, the AAA rating can be retained and the fiscal health of the country can improve dramatically. A growing number of investors are skeptical of our ability to pass reform that is palatable to both the voters and the rating agencies. They are already positioning their investments for the possibility of a downgrade.
The prudent investor we serve is accustomed to living well within his or her means and finds this discussion disheartening. Nevertheless, it can’t be neglected. Proactive risk management requires recognition that the United States may not enjoy a AAA rating and corresponding rock-bottom interest rates indefinitely.