The Scariest Balance Sheet of All

If I showed you a company with rapidly dwindling earnings, skyrocketing debt, a consistent culture of fiscal mismanagement, unfunded pension plans, unpayable accounts payable, and a tenuous credit rating, there'd be no way I could convince you to buy the stock, right? 

What if that same company issued bonds with negligible yields, even as scores of less-impaired competitors saw their credit ratings cut? Would you line up to buy those bonds? Yet that is precisely what every holder of United States Treasury bonds has done. 

The United States is a sovereign nation backing the reserve currency of the world, so I understand that the analogy is not exactly a clean one. After all, a sovereign state is not bound by the same rules that govern a corporation's practice. Unlike a corporation, a nation can theoretically issue unlimited mountains of debt; when buyers turn shy, it can even issue that debt to itself. But then again, isn't that precisely the problem here? Perhaps by assessing the fiscal status of the United States as we would examine a corporation, a clearer picture of the real face of this crisis could emerge. 

Across every sector and in every corner of this great land, public corporations are taking prudent measures to hunker down and weather this storm. Deep in the heart of Texas, refiner Valero (NYSE: VLO  ) is shutting facilities to bring production below 70%-75% of capacity. In Charlotte, North Carolina, steelmaker Nucor has managed to rein in production by 50% without resorting to layoffs. Employees of many other companies have not been as fortunate, with scores of layoffs reported by retail giants like Home Depot (NYSE: HD  ) and coffee chain Starbucks (NYSE: SBUX  ) , heavy manufacturers such as Caterpillar (NYSE: CAT  ) , and of course, embattled financial entities like Citigroup (NYSE: C  ) . 

While companies like these scale down dramatically to confront this recession in a fiscally responsible manner, how is it rational for the United States to issue unprecedented levels of new debt in an attempt to spend its way through? Congress is deliberating an $819 billion stimulus plan, which it will pile atop more than $8.6 trillion in potential outlays already tossed on the fire. We're told to expect another $2 trillion added to the ballooning national debt in 2009 alone. With tax revenue poised to decline, projected budget deficits of more than $1 trillion per year, and mounting unemployment, how exactly are we as a nation expected to repay all of this debt?

That, fellow Fools, is the critical question, and it draws a line in the sand that could ultimately constrain future spending. Thus far, foreign nations like China have financed our spending through the purchase of Treasury bonds, but at some point, total indebtedness from this scale of deficit spending suggests either of two unattractive scenarios: a strategic decision by a major foreign holder to begin unloading reserves in a meaningful way, or a downgrade of the nation's credit rating.

Those who have dismissed the latter scenario as impossible are no doubt reconsidering following Iceland's collapse; recent credit downgrades for Greece, Spain, and Portugal; and even the specter of a downgrade for Britain. In fact, Moody's quietly issued a warning about a potential downgrade of the U.S. credit rating more than a year ago, in the context of Social Security and health-care spending … back when a TARP was something for covering your firewood, and banks were presumed by many to be solvent. For a sobering example of what unsustainable levels of debt can do to a public corporation, look no further than bulk shipper DryShips (NYSE: DRYS  ) , which recently broke loan covenants on its massive debt burden.

However urgent we're told each of the successive expenditures are, I believe that the fundamental unsustainability of this type of spending will result in the declining purchasing power of the U.S. dollar. Whatever your position regarding whether inflation or continued deflation will characterize the road ahead, neither scenario changes the underlying degradation of the dollar as the very perception of the nation's solvency comes into question.

The topic's not fun to consider, but I believe Fools must maintain an unfettered view of the dangers inherent in the present strategy of spending to confront the deleveraging process. Following a historic flight into Treasury bonds by investors worldwide as this crisis unfolded, many perceive a bubble in the making, which prompts the question: What safer haven exists than U.S.-issued debt? Trading at all-time highs against a host of major world currencies, and given recent gains against even the near-term relative strength in the U.S. dollar (compared to the British Pound, for example), I believe many investors are looking more seriously than ever to one time-tested safe haven asset: gold.

Further Foolishness:

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Starbucks and The Home Depot are Motley Fool Inside Value recommendations. Starbucks is a Motley Fool Stock Advisor selection. The Fool owns shares of Starbucks. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Christopher Barker thinks that a key word for 2009 could be "consequences."He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Caterpillar and Valero Energy. The Motley Fool has a fiscally conservative disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2009, at 3:28 PM, DaretothREdux wrote:

    "If I showed you a company with rapidly dwindling earnings, skyrocketing debt, a consistent culture of fiscal mismanagement, unfunded pension plans, unpayable accounts payable, and a tenuous credit rating, there'd be no way I could convince you to buy the stock, right?"

    I made this exact same points months ago to many of my friends and family, and then said...well, too bad you already do since you carry the USD.

    Great article man!

  • Report this Comment On February 02, 2009, at 7:59 PM, tommybgoode wrote:

    Indeed, the current administration is between a rock and a hard place. But I would ask the same questions about the wisdom of spending $600 million on the occupation of a country which "competed" with ours in only the most tenuous way. What synergies did we hope to achieve by this "merger?" How did it improve our product line or our ability to compete in relevant markets? The invasion of Iraq is not unlike the Time Warner-AOL merger in its complete lack of practical sense.

  • Report this Comment On February 02, 2009, at 8:00 PM, tommybgoode wrote:

    Pardon, I naturally meant $600 billion.

  • Report this Comment On February 02, 2009, at 8:46 PM, XMFSinchiruna wrote:

    Great point, and clever continuation of the analogy. :)

    Some day I'll tell you guys a story about the Time Warner-AOL merger. I was a fly on the wall for a very interesting meeting.

  • Report this Comment On February 03, 2009, at 12:16 PM, racoon1174 wrote:

    I think its a very poor point. Whatever your thoughts on Iraq we are there, its won and we'll be leaving soon. Its in the past. Our fiscal future is bleak and our glorious leaders in congress and the president are planing on spending 1.5 times the amount we spent on Iraq on this non-stimulus stimulus. Mortgaging our and our childrens future to put new sod on the mall and studdy VD. The WSJ says 1/12 will actually have and jobs growth. What the hell are we (or they if you prefer but since we put them there we have to accept resposibility) thinking.

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