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Spiraling debt is Uncle Sam's shock collar, and its jolt may await like an invisible pet fence.
"Nobody knows when you bump up against the limit, but you know when it happens it will really hurt," said fiscal watchdog Maya MacGuineas of the Committee for a Responsible Federal Budget.
The great uncertainty about how much debt is too much has tended to make fiscal discipline seem less urgent, rather than more. There is no obvious threshold beyond which investors will demand higher real yields for holding U.S. debt. Vague warnings from ratings agencies about the loss of America's 'AAA' status haven't added much clarity — until recently.
In the wake of the financial crisis and recession, Moody's Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.
The key data point in Moody's view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody's managing director Pierre Cailleteau confirmed in an e-mail.
Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.
But under more adverse scenarios than the CBO considered, including higher interest rates, Moody's projects that debt service could hit 22.4% of revenue by 2013.
"While we see limited risk of a U.S. sovereign debt downgrade in the next 2-3 years, beyond that we cannot be so certain," wrote Societe Generale's economics team in a recent report.
The Moody's ratings framework is one that could have a significant influence on policy — particularly in a crisis.
Because debt levels and interest rates can't be lowered overnight, the obvious way of staying within the AAA limits set by Moody's would be to raise revenue.
"It would bias the remedy in favor of tax increases for countries that want to improve their bond rating," said Brian Riedl, budget analyst at the conservative Heritage Foundation.
Because economic growth is a key to fiscal health, Riedl argues that a ratings agency concerned about whether bondholders are repaid should bias spending cuts over tax increases.
Moody's says that its framework focuses on debt affordability rather than debt levels as a percentage of GDP. "The higher this ratio (interest/revenue), the more public debt constrains the formulation and delivery of other policies," Moody's analysts wrote in March.
Editorial pages may rage against the Arizona immigration law, but a solid majority of Americans support it, an IBD/TIPP poll found. Sixty percent back the law, with 40% strongly favoring it, according to preliminary results. Meanwhile, 30% oppose it, with 20% strongly disapproving it. The remaining ...
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Liberal groups are experiencing buyer's remorse over Democrats' proposed campaign finance bill. Restrictions they thought would hit only corporations are broad enough to include them too. Those groups, led by Big Labor, had clamored for new legislation. While still publicly supportive, they are ...
The government and the Federal Reserve are winding down massive stimulus programs as the economy recovers. But can they both exit at the same time without sending the economy back into recession? The Fed has ended most of its emergency lending programs but likely will reiterate Wednesday that it ...
With polls giving Democrats a dire prognosis for their efforts to save their congressional majority, the leadership has responded by performing emergency surgery on the legislative agenda. The triage included pulling the plug on a long-in-the-works greenhouse gas bill in favor of another bid to ...
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