The great, steaming debt pile

Standard and Poors last night placed the outlook for the US’s AAA rating on negative watch for a potential downgrade citing not just this recent budgetary impasse but also the trajectory of the United States Governments debt position. The charts below show just why S&P is worried.
It’s common these days to think of debt in terms of a ratio to GDP and this chart, data from Bloomberg, highlights an alarming trajectory for the US’s fiscal position. Even the most conservative extrapolation of this trend would end in tears:

Now look at the monthly deficit position going back to October 1999 (the first month of the 2000 budget) through to the latest release as at March of this year overlaid with the rolling 12 month budget deficits for each year. The US budget woes, while already deteriorating ahead of the GFC have gotten significantly worse since:

But the truly scary thing, at least for holders of US debt and dollars is the continued acceleration this year. If we take a look at the outcomes of the first 6 months of deficits from the last 3 years we can see that the 2011 budget deficit is on track to exceed both 2010 and even 2009 despite an ‘economic recovery’:

The United States has a deficit and debt problem and the political classes are playing politics. It’s obvious why S&P are worried. When will investors be???

Latest posts by _EcoRon_ (see all)


  1. What happened to Japan every time they were downgraded?


    And nothing will happen to the U.S. either.

  2. Deus Forex Machina

    Hey BK

    I reckon the answer is yes and no…Japan was never the world’s reserve currency and as a net exporter of capital it didn’t matter…US is different, deficit nation etc.

    But the key is the US hasn’t been down graded yet…it is still a couple of years away…and they are still a very flexible economy that will come back strongly at some point. Just not at the moment.

    So maybe I meant No and Yes 🙂

  3. “It’s obvious why S&P are worried.”

    Not to me.

    Isn’t the rating an estimate of the risk that a USD bond holder will not get paid?

    USD bonds require payment in USD. The US can create USD can’t it? So in what circumstances would the US not be able (or refuse) to pay out a USD bond holder??

    • Deus Forex Machina

      Excellent point. Carment Reinhart and Ken Rogoff in their book (This Time it’s different) which looks at the history of these types of crises over the centuries actually include “money printing” as a default. And in the modern context there is a chance that the US can print money and inflate away the debt. But foreign holders would still lose value in their home currency when they repatriate it.