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Second-Rate Credit Rating for the US?

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It should come as no small surprise that the threat of a downgrade to the US's triple-A rating, which the country has had since World War I, comes at the same time the White House and Congress are allowing TARP mission creep.

The President now wants to use unused TARP funds for a new program to create jobs, as high unemployment could cost the Democrats their own jobs in the mid-term elections.

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Remember the TARP scare tactics the government used to launch this bank rescue fund in the fall of 2008? When we were told we had nothing to fear but catastrophe itself?

A taxpayer-backed fund launched because the bank regulatory antenna had somehow mysteriously fallen off the roof of the Treasury Dept. and the Federal Reserve?

Launched because regulators didn't notice that the banks had fricasseed their balance sheets and were careening around in hospital gowns?

Is it the government's deficit spending attitude, like using TARP for a job bank, that is behind the reason why the US's rating is threatened to begin with?

Federal Reserve chairman Ben Bernanke made a chilling comment about the US's drunken fire brigade of deficit spending at his re-confirmation hearing last week, a comment which flew under the radar screen.

He said in response to a Congressman's question about the government's outsized deficit spending, that "if creditors lose confidence in the US," the Fed "can't control interest rates, there's nothing you can do about it."

And rates would surely rise if the US loses its triple-A status by 2013, Moody's Investors Service has warned, a triple-A status the US has held since 1917.

Moody's says this could happen if the country doesn't get a grip on its deficit spending, if economic growth weakens further, if interest rates go up, and if the US government can't successfully wind down its bank bailout plans.

Emphasis on the final point, given TARP mission creep.

The US debt to GDP ratio is estimated to climb to 97.5% by 2010, up from 87.4%.

The US is fast joining the ranks of Zimbabwe, Lebanon, Jamaica, and Italy in its sizable debt to GDP ratios (a ratio which measures the debt burden against a country's ability to generate wealth to repay its creditors).

In 2008, the U.S. ranked 23rd on a list of countries with high debt to GDP ratios—if it crosses the 100% mark, the US would rank seventh, reports indicate.

Also, the debt-to-GDP ratios don't take into account unfunded liabilities for Social Security and Medicare, sums which could block out the sun and which would make those ratios much worse.

It is now cheaper to insure debt from IBM, McDonald's and Microsoft versus US debt. It has not been so exceedingly rare for some time now that a computer and software maker, as well as a fast-food chain, are viewed as safer investments than the bonds of the world's number one superpower.

The threat of a downgrade is a quick reversal from Moody's assessment in July, that the U.S. credit rating was " a solid triple-A." The UK may lose its triple-A status, too, says Moody's.

If it loses its Triple-A status, the US may drop below the credit rating status of Germany, France, Canada, Switzerland, Luxembourg and New Zealand.

What are the implications here?

First, it's right to question the competence of the credit rating agencies, which handed out triple-A ratings like Kleenex at an asthmatics convention.

Lloyd Blankfein, chief executive of Goldman Sachs, said at the Council of Institutional Investors in April: “In January 2008, there were 12 triple A-rated companies in the world. At the same time, there were 64,000 structured finance instruments, like collateralized debt obligation (CDO) tranches, rated triple-A.”

Even so, a downgrade of the US has been talked about since at least the mid-90s, when the ratings agencies threatened to make this move after the US government came to a budgetary impasse, when former House Speaker Newt Gingrich sparked a battle with the Clinton Administration.

But now, this time it's different, because the US's deficit spending has mushroomed since then, and has swamped the US GDP, once you factor in Social Security and Medicare.

Worst case scenario, a downgrade would mean higher borrowing costs for the US government, which could trigger higher borrowing costs for consumers.

The dollar could lose its global reserves' status. China, Russia, Japan could unload US dollars, they being the three with the largest stockpiles of greenbacks. Already, China and Russia have repeatedly called for less global reliance on the dollar.

No right-minded person thinks the US will default on its debt. Instead, it will inflate and devalue its way out of this crisis.

But the problem is, the US is borrowing just to pay interest on the debt, an interest cost that is now about one-eighth of US annual tax receipts, individual and corporate combined.

Already, the US spends $383.3 billion annually in interest on the US debt. That is enough to pay for the annual budgets of 18 government agencies, including the annual budgets for the legislative branch, the judiciary, Homeland Security, and Housing and Urban Development.

That $383.3 billion is the size of the economies of Belgium or Malaysia. It's the size of Norway's sovereign wealth fund, one of the world's largest.

For now, interest costs on the US debt have remained low, just as Japan's rates have stayed low as it is essentially locked in a deflationary spiral.

Problem is, short term bonds now make up a third of the Treasury debt mix, up from a fifth just a decade ago. Those short-term rates could rise if the Federal Reserve decides to hike rates, as the Fed funds futures market is predicting may happen next summer.

Also rates could rise as a bond glut is now underway, given the borrowing other countries around the world are doing to conduct their own economic recoveries.

Interest costs have been kept lower by an average $45 billion a year on the $7 trillion in public debt (which doesn't include IOUs held by S.S. and Medicare, spiking it higher to $12 trillion), because of the 2.5% blended rate the US pays on its debt, vs 3.2% if the mix comprised more long-term bonds, reports indicate.

However, treating TARP like Congress's all purpose slush fund is an abuse of the public purse.

It's plain wrong for the government to assume that, because its estimates show the TARP bank rescue fund will cost $200 billion less over the next decade versus what the government expected in August, then ipso facto it can then use those taxpayer funds for, say, a jobs fund to preserve their own jobs.

Also, that $200 billion swing is just the government's snapshot of the health of TARP right now. It doesn't count looming bank problems, especially at regional banks suffering fm commercial real estate loans where the TARP funds may be needed.

We have fallen through the looking glass.

Either give TARP back to taxpayers, pay down the deficit or replenish the bank Federal Deposit Insurance Corp.'s deposit insurance fund, as problem banks continue to mount.

Richard Suttmeier of has examined the government data on problem banks. Here what he says:

Through December 4, 2009 the tally is 155 failures: 25 for all of 2008, 21 in the first quarter of 2009, 24 in the second quarter, 50 in the third quarter, and 35 so far in the fourth quarter.

The FDIC's list of problem panks increased to 552 at the end of the third quarter from 416 in the second quarter, which implies that the FDIC added 186 banks to the Problem List in the quarter if you assume that the 50 seized banks were on the list.

As a result of continued need to close banks, the FDIC Deposit Insurance Fund ended the third quarter in arrears by $8.4 billion the first negative read since 1992. With the 35 failures so far in the forth quarter, my estimate is that the fund deficit is now $16.6 billion.

By the end of this year FDIC member banks must pony up a total of $45 billion in insurance fees prepaying for 2010 through 2012.

The FDIC has already pre-spent 36.9% of this money.

The FDIC expects bank closures to cost the Deposit Insurance Fund $100 billion through 2013, but by June 2013 the fund must return to 1.15% of insured deposits.

This will be difficult without help from tax payers through the $100 billion line of credit with the US Treasury. The FDIC has a $500 billion temporary line of credit with the US Treasury, but considers tapping that as a last resort.

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