Moody's keeps U.S. AAA rating, but with a caveat or two

No one in his or her right mind really thinks that the United States will lose its "AAA" rating. The U.S. economy is still the world's largest with a GDP of over $14 trillion. The deficit may be rising, but if the recession ends soon, consumer and business spending should rebound. The demand for Treasury paper remains strong and the largest purchasers, especially China, have indicated they are still ready buyers.

Moody's reaffirmed its "AAA" rating on U.S. debt but added a caveat or two. According to Reuters, the future risks the Treasury faces could change fairly fast. A Moody's official told the news agency, "That will happen for two reasons. Either our assumptions in terms of debt reversibility prove to be wrong. That is, in fact the U.S. government is unable to bring public debt back to a downward trajectory," or if the United States' ability to raise a large amount of debt at a low cost were to be put at risk.

Unemployment is probably still the single largest barrier to dropping the deficit. If 10 percent of American are unemployed for any period, the national tax bases will be seriously eroded. It will almost certainly cause a sharp drop in consumer spending, which would, in turn, hurt IRS receipts from businesses.

Treasury yields have only moved very modestly this year, even though American borrowing has moved up by hundreds of billions of dollars. The government's need for capital will continue to be extraordinary as the year passes. If revenue numbers are well below the U.S. budget as the year ends, the Moody's rating will be in jeopardy.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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