Government Grade Junk

Government Grade Junk

The credit rating enjoyed by these United States of America may have seen its last days, at least for a time. People want to know what happens when the most stable, leader of the free world has a credit crisis of major proportions. All one can do at this point is speculate on the worst and hope for the best, and hope that best is not an issuer of Treasury Junk Bonds.

The US government is viewed as the safest credit risk on the planet, in fact US Treasuries are widely considered to be risk free, or at least that’s what people used to preach. Our country’s credit rating has been AAA since the early 1900’s and has never suffered a downgrade. If the US government really did have such a rating, then it is a given that they would have some of the same characteristics as Berkshire Hathaway for example, with the same AAA rating, right? They would have a sound monetary system, excellent control over their budget, honest financial reporting and a first rate internal auditing system. That does not sound like the US government I have grown to know and love. And if our Government does not resemble any of the above why are we deemed the safest and most secure credit risk in the world? Now that I think of it, they (US Government) are starting to sound a bit like junk.

I wonder, and I am sure a lot of people do, given our current economic situation and our countries indebtedness; do we really qualify for the rating of AAA/Aaa? If we don’t deserve the stellar rating, who has the courage to issue the downgrade. When you start thinking about the possible fallout from such a downgrade, is there anyone in his right mind that would want his name attached such a credit crisis?

The greater the potential tax base of the borrowing country, the greater the ability of the government to repay its debt. However, thanks to easy money the American taxpayer is living well beyond their means. Unemployment is increasing and personal income growth is on the decline. Private households have increased their spending by 139.4 billion while earnings have increased to 81.6 billion.

In the beginning of 2005 well ahead of the housing bust, there was great speculation about our countries rating and current indebtedness. Fast forward four years and things are looking even grimmer. Employment is way down, and unemployment and under employment is way up. All this points to is a decrease of tax base of the country which directly affects the ability of our government to keep up with its debt obligations. With our countries workforce in such bad states, is there any way to really sustain what appears to be the beginnings of an economic recovery? The market may be rockin’ but how long is that going to last when it’s tied to an economic recovery that is just a house built upon the sand?

A credit downgrade may be the wave that sweeps us all out to the open sea, and then what happens to our barely started recovery?

Good luck and happy investing.