Why a Downgrade in the Credit Rating of U.S. Debt Is Imminent

By Thursday, April 25, 2013

A report from Standard & Poor’s (S&P), the credit rating agency, indicates there is more than a one-third chance that Japanese sovereign debt could face a downgrade. The report stated, “…the continuing prospect arises from risks associated with recent government initiatives and uncertainty of their success.” (Source: Janowski, T., “S&P says more than one-third chance of Japan downgrade, cites risks to Abenomics,” Reuters, April 22, 2013.)

In an effort to spur economic growth in the country, the Bank of Japan is printing money “like mad.” But we already know this concept hasn’t worked very well for the Japanese economy in the past. Japan is in an outright recession, with exports in a slump and the value of its currency in a freefall when compared to other major currencies in the global economy.

Why does it really matter to North Americans what happens in Japan? Even though S&P kept the credit rating on Japan’s sovereign debt at AA- (or investment grade), the concern is how vulnerable the U.S. debt really is to its own credit rating downgrade.

Just like the Japanese economy, the Federal Reserve is using quantitative easing to print $85.0 billion a month in new paper money and has thus far increased its balance sheet assets to over $3.0 trillion. Similarly, the U.S. government has been “spending with two hands, while borrowing with a third.” Why? It’s all in the name of economic growth.

As the readers of Profit Confidential know, I have been very critical of quantitative easing. It may have been needed back when the financial system was on the cusp of bankruptcy in 2008. But continuing the process will just create more troubles ahead for the U.S. economy. The idea of quantitative easing and keeping interest rates artificially low for so many years can only work for so long before inflation becomes a problem.

The longer the government keeps on borrowing to spend, the higher the chances that the country will hit a point where a downgrade in the credit rating of the U.S. government debt is inevitable. We are the most indebted nation in the world by nominal value.

Economic growth means that the general standard of living increases, people are able to find jobs, and consumers are able to save and spend. Right now, the U.S. economy is far from it. Quantitative easing and easy monetary policies are threatening Japan’s credit rating. The U.S. will face the same situation if the country doesn’t get its spending and borrowing under control.

The question remains: what benefit has quantitative easing brought to the average American Joe? Chances are his after-inflation income has not risen in years, he is living in a home with negative equity, and he’s paying more for goods than he did not too long ago.

The stock market may rally on news about more quantitative easing, and politicians may cheer and say we have economic growth when they see the stock market continue to rise, but the reality is that the U.S. is becoming very similar to the Japanese economy.

What He Said:

They year “2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter.” Michael Lombardi in Profit Confidential, August 24, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

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About the Author, Browse Michael Lombardi's Articles

Michael Lombardi founded investor research firm Lombardi Publishing Corporation in 1986. Michael is also the founder and editor-in-chief of the popular daily e-letter, Profit Confidential, where readers get the benefit of Michael’s years of experience with the stock market, real estate, economic forecasting, precious metals, and various businesses. Michael believes in successful stock picking as an important wealth accumulation tool. Michael has authored more than thousands of articles on investment and money management and is the author of several successful... Read Full Bio »