--Moody’s press release on the US rating review (7/13/11)
It would appear that what is most likely to happen is that a ceiling deal will be agreed, the ceiling will be raised and default will be avoided, thus allowing the agencies )or at least Moody's) to retain the AAA on the US, which would be good. However, it is pretty clear that while Moody’s rating will be confirmed at Aaa, the rating outlook will be negative. This because the two other conditions (deficit trajectory and a debt-ceiling permanent fix) are highly unlikely by August 2nd.
However, there is the possibility of an eventual bipartisan deal on the budget. Fixing the debt ceiling permanently will be harder. One idea would be to abolish the debt ceiling in exchange for a balanced budget amendment. This is a very bad idea, because it would create a big crisis the next time the economy has a heart attack. But it doesn’t matter because I don’t think there are the votes.
Another idea (mine), is both easier and better: index the debt ceiling to a fixed percentage of nominal GDP (e.g., the current ratio). This doesn’t require adding a bad and unenforceable amendment to the Constitution, and it should prevent further unending ceiling crises. It’s not perfect (the recession problem), but it can be adjusted at any time by legislation. Or, simply restore Gramm-Rudman-Hollings that required a balanced budget (which means it can be suspended when necessary by legislation). Under GRH the budget was not only balanced, it went into surplus. Remember the looming “Treasury shortage”? Bush and Obama solved that problem.
I certainly hope that both issues can be addressed to Moody’s satisfaction, because they are necessary, and because the US does not need the overhang of a negative rating outlook. The world will be a better place if the US can change its fiscal trajectory and stop having these artificial ceiling crises, and if the Aaa can move back onto more solid ground. The US should be Aaa1 (AAA+), not Aaa3 (AAA-). (When Moody’s started publishing sovereign ratings in 1918, the US bond rating was Aaa*, denoting an even higher category not bestowed on any other country’s.)
I think Ron Paul (who is chair of the House Subcommittee on Domestic Monetary Policy) has now shown himself to be utterly unserious and a truly dangerous person. He wants to abolish the Fed, return to gold AND cause a US default. This would all be fine if he was still publishing his loony newsletter. Just imagine how his plan would play out: no fiat currency, no lender of last resort, and no bond market.
In fact, we’ve already been there in 1932-33, when the US was on gold, there was no fiat currency, Treasury was running out of cash, the Treasury bond bond market was closed (because the banking system was contracting), and Hoover was forced to cut the budget in the middle of a financial panic. That was not an experiment to be repeated outside of a laboratory.