The AAA Wars

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Did you hear? America is no longer a AAA-rated nation.

Or maybe it is. It depends on who you ask.

Standard & Poor's downgraded the nation's credit from AAA to AA+ earlier this month. It was major news around the world, roiling financial markets and bruising the confidence of an economy already lacking it.

Less noticed: The two other major rating agencies -- Moody's (NYSE: MCO  ) and Fitch -- both affirmed the nation's AAA credit rating. Fitch even affirmed with a stable outlook, indicating there's no risk of a downgrade in the immediate future.

By a two-to-one margin, major rating agencies still rank the United States as decidedly AAA. S&P made the most noise, but its view is still the minority.

So who's right?

Part of the problem is that there are no right answers. Ratings are nothing more than someone's opinion, and rational minds can disagree. Different analysts can come to different conclusions for different reasons, both formed by well-reasoned arguments.

The rationale for S&P's downgrade centered around the nation's political dysfunction -- a point that can hardly be questioned. The history of sovereign defaults makes it painfully clear that countries stop paying their debts when they want to, not when they are forced to. Defaults usually aren't economic events; they're political ones. The debt-ceiling debate showed that a faction of Congress is willing to default on the nation's debt in order to make a moral point about taxation. That's as good a reason to be stripped of AAA as anything.

But not everyone took the debate so seriously. Maybe it was merely posturing, and there was never any true risk of default. Churchill's quip that "America will always do the right thing, but only after exhausting all other options" was repeated ad nauseum during the debt-ceiling debate, perhaps for good reason. When reaffirming the nation's AAA rating, Fitch seemingly shrugged off the political fracas and focused on America's dominant economy, the dollar's status as the world's reserve currency, and the benefits of owning a printing press:

The affirmation of the US 'AAA' sovereign rating reflects the fact that the key pillars of US's exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to 'shocks.'

This, too, can't be questioned. A country that owes all of its debts in a currency it can print at will should never have a debt problem. An inflation problem, yes. A currency problem, of course. But not a debt problem. Whatever America borrows, it can pay back. S&P still rates Johnson & Johnson (NYSE: JNJ  ) , ExxonMobil (NYSE: XOM  ) , Microsoft (Nasdaq: MSFT  ) , and ADP (NYSE: ADP  ) as AAA credits. None have printing presses, and none can raise taxes.

And despite rhetoric to the contrary, America's current debt load is hardly onerous. For any organization with an indefinite lifespan -- such as corporations and countries -- the most important metric when measuring a debt load is not the total amount of debt, but the cost of carrying that debt. Thanks to record-low interest rates, the cost of carrying America's debt is at a generational low. Consider: Ten years ago, when the federal government ran surpluses and total debt was less than half current levels, interest payments on the national debt cost taxpayers $222 billion a year. Today, it's $196 billion a year. Total debt has surged, but the burden of that debt on budgets has dropped substantially. Will that change when interest rates rise? Of course. Then again, the weaker the economy gets, the lower interest rates have gone. That's the benefit of being the world's reserve currency.

So who is right? S&P says our political system is broken. It's correct. Fitch says our economy is large enough to pay its debts, and if needed we can simply print money. It's also correct.

The best way to reconcile the two ratings is to acknowledge what they are: opinions. Neither S&P nor Fitch nor Moody's has a monopoly on the truth, and none have stated anything over the past month that wasn't already well-known. A few analysts disagreed with each other. It happens. Move along, folks.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Johnson & Johnson, Exxon, and Microsoft. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Johnson & Johnson and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, Automatic Data Processing, Johnson & Johnson, and Moody's. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft, as well as a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (29) | Recommend This Article (29)

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 August 19, 2011, at 5:14 PM, A700 wrote:

    "The debt-ceiling debate showed that a faction of Congress is willing to default on the nation's debt in order to make a moral point about taxation. That's as good a reason to be stripped of AAA as anything."

    This opinion seems to suggest that there are only two options: default or increase taxes. there is a third: make cuts.

    I have done business with all levels of government for the past 20 years and I can tell you with absolute certainty that they waste billions every year intentionally. Should we never hold them accountable and simply let them tax us until the rate reaches 100% of income? What then?

  • Report this Comment On August 19, 2011, at 5:18 PM, marketmaker2100 wrote:

    The USA is AAAAAA.

    There is no question that we need to get our house in order, but the reality is that there is no other house even on the same block! Investors have voted and they voted AAA for the USA.

  • Report this Comment On August 19, 2011, at 5:54 PM, xetn wrote:

    The real rating is AAAAAA BS! I believe that Moodys and Fitch are scared because of the drubbing that S&P took after the downgrade. Now LA is planning to cancel S&P's contract. The lesson is: if you don't like the rating get rid of the agency. Don't fix the debt problem.

    The fact is the US's debt is the highest in history. It has already defaulted several times in the past, the last time in the mid 1990s. So, default is nothing new (even though Obama lied on tv about it). But then Obama doesn't know a default from a donut. All he know is spend spend and tax. In fact, he is the same as Bush only worse.

  • Report this Comment On August 19, 2011, at 7:26 PM, martianrealist wrote:

    Clearly, there is no one solution to the debt problem. It will take a Congress that is willing to institute a wide range of cuts across the board, a charismatic leader who can rally Americans behind him/her to accept a higher income tax rate and hopefully spread a pervasive sense of optimism in the midst of all the devastation around us and less military involvement globally. Basically, the country would have to be run by Republicrats :-)

    Stellar rating or not, it is evident that as a country, we are going to sail through some very very difficult times in the short run. But the incurable optimist in me says that, in the long run, ultimately our nation and the American spirit will prevail.

  • Report this Comment On August 19, 2011, at 8:31 PM, marketmaker2100 wrote:

    xetn, what happened to US Treasuries after the S&P downgrade? You'll find your answer there.

  • Report this Comment On August 19, 2011, at 10:44 PM, griderX wrote:

    Intresting news...MOODY’S ANALYST BREAKS SILENCE: Says Ratings Agency Rotten To Core With Conflicts, Corruption, And Greed!

  • Report this Comment On August 19, 2011, at 10:50 PM, TruffelPig wrote:

    S&P may also have own interests.

  • Report this Comment On August 19, 2011, at 11:36 PM, fiduke27 wrote:

    196 billion in interest a year? How about 412 billion.

    As for surpluses? a couple simple searches on show there were no surpluses in the 1990's

  • Report this Comment On August 20, 2011, at 12:12 AM, FleaBagger wrote:

    Who is correct? None of the above. US treasury debt is not only worse than AAA, it is not even close. The odds that you will ever get your purchasing power back if you buy UST's at these levels are about 1trillion:1. Can the Fed just print money for the Treasury to use to pay their bills? Of course! But then, those who bought a Ferrari's worth of UST's will only have a Ford's worth of dollars. Or a Radio Flyer's worth.


  • Report this Comment On August 20, 2011, at 8:20 AM, reflector wrote:

    i rate us treasury debt as junk.

    a society built on decades of indulgence and excess, perpetuated by too-easy credit, and now being propped up by "stimulus" in a last-ditch effort to preserve the crumbling status quo, is not sustainable, and has no future.

    the fed's policy of dealing with treasury debt by inflating it away is irresponsible, and compounds the problem instead of dealing with it.

    guess it's time to start preparing for the coming financial collapse, 2008 was just a warm-up.

  • Report this Comment On August 20, 2011, at 9:15 AM, ldgpangeo wrote:

    The grinches are busy posting on this story.

    It's valuable to remember that it took several years to build this debt level and it will take several to unwind it in an orderly manner. Today's deficit hawks are trying to create a sense of panic that we must get back into balance instantly -- a move that will do great harm to the economy at all levels (local, national, global).

    They have also tried to create the impression that there is no third path between drastic instant cuts and unlimited tax and spend.

  • Report this Comment On August 20, 2011, at 10:25 AM, kickbishopbrenna wrote:

    So the agency that decided GOOG went from a price target of 700 to 500, and from 5 stars to 2, because of a 40-dollar a share purchase, also thinks USA has dropped in ratings..hmmm, wonder who should lose more credibility here..S and P or USA..yes the debt BURDEN argument is a good one, but if you print money, tehn interest rates go up, BAM! interest and debts become a leveraged problem.Looking from Europe (ireland) I feel they got it wrong, but not as much as "ultras" would have you believe.

  • Report this Comment On August 21, 2011, at 9:11 AM, junklinerdriver wrote:

    Xten. I guess La has the mind set that if you don't like the message... shoot the messenger

  • Report this Comment On August 21, 2011, at 3:50 PM, yhtbaotbai wrote:

    It depends upon WHOM you ask.

    If you ask ME: (1) Please respect how the market for U. S. Treasury notes and bonds has been behaving in recent weeks. I pay more attention to the actions of the market, in preference to the musings, or to the announcements, of S&P. (2) If any investor feels uncomfortable about the recent stateside "to-ing-and-fro-ing" at the U. S. national level of government, that investor should be reminded that Europe has zero political authority over the entirety of the euro-currency participants. Zero. That is a noteworthy reason why so many euro-nations have not been as careful as others, regardless of which countries are considered, or have recently been considered "AAA." (3) Our political "leaders" -- please permit me to use that word loosely -- may well be replaced in due course. Part of the strategy of our Founding Fathers was to establish specified terms-of-office at the national level of government; our electorate can, and oftentimes does, make replacements. (4) I cannot prove this, but I suspect that S&P may do certain things for emotional and/or for political reasons.

    YHTBAOTBAI, Sunday afternoon

  • Report this Comment On August 21, 2011, at 6:23 PM, hegibson wrote:

    The system is man made and the dysfunction is man-made. The problems are so systemic that it is hardly likely that the two political parties that are actually responsible for it can "fix" it. So, it is more likely that the uncertainties will continue with endless promises by both parties that they can fix it and of course the American public will vote for them because there is no alternative. The talk about fixing it is nice but the remedy is probably more than anyone would be really willing to attempt.

  • Report this Comment On August 21, 2011, at 6:51 PM, TeaPartyPatriot wrote:



    S&P gets it correct. One out of three being right is almost bad enough for government work

  • Report this Comment On August 21, 2011, at 9:23 PM, cmfhousel wrote:


    The relevant figure is net interest. Interest paid to Social Security trust funds isn't a cost to taxpayers.

  • Report this Comment On August 22, 2011, at 12:03 AM, NOTvuffett wrote:

    It seems to me FleaBagger made the most cogent point, here is the most important part: "Can the Fed just print money for the Treasury to use to pay their bills? Of course! But then, those who bought a Ferrari's worth of UST's will only have a Ford's worth of dollars. Or a Radio Flyer's worth."

    Can any sovereign nation print its own money? yes. Can they issue their own their own bonds? yes. So logically it is impossible for them to default on them. Here is a site where you can view a $100 trillion dollar bill from Zimbabwe-

    There seems to be some confusion about the credit rating agencies. There are other less well known agencies that have downgraded the usa debt as well. These credit rating agencies don't exist to be cheerleaders for those they rate, they exist to assist investors on judging risk.

    Morgan, I guess it is no secret that I am ideologically opposed to you on almost every issue. That is fine and that is how we learn through dialogue. However, your statement that "Interest paid to Social Security trust funds isn't a cost to taxpayers" just leaves me dumbfounded.

  • Report this Comment On August 22, 2011, at 4:48 AM, fiduke27 wrote:


    At the time we anticipated budget surpluses of around 800 billion this year, in which case, the Social Security moves made a lot of sense, genius in a way. I would agree with your statement 100% in the late 90's without foresight into today's economy.

    As we all know, things happened between now and then putting the economy in a long recession.

    Now, since we don't have those budget surpluses as projected, we have to take on new debt to pay for social security which can not be paid for on social security taxes alone. This new debt is a cost to taxpayers.

    Consider the G Fund and CSDRF that Geithner removed funds from to tide over the government before the ceiling was raised. In a way, you could consider that not a cost to the taxpayers. Once the ceiling was raised, those funds were repaid with interest from new debt that is a cost to the taxpayers.

    So I understand your point, but I respectfully disagree. If I am missing something please inform me, because this topic is of great interest to me. Thank you for the good article.

  • Report this Comment On August 22, 2011, at 8:50 AM, cmfhousel wrote:

    <<Can any sovereign nation print its own money? yes.>>

    Ask Greece how that's working out.

  • Report this Comment On August 22, 2011, at 8:53 AM, cmfhousel wrote:

    < your statement that "Interest paid to Social Security trust funds isn't a cost to taxpayers" just leaves me dumbfounded.>>

    It's money moved from one govt account to another govt account. Money paid on SS trust fund interest is used to cover SS benefits. Can you explain why that's dumbfounding?

  • Report this Comment On August 22, 2011, at 9:24 AM, NEMnyWtch wrote:

    Although a cranky subject for a Monday morning, another great article that makes us think Morgan, Thx!

    @A700 Right on.

    Aside from reading the numeric banter, what I love about this article is the focus on the reality of what an analyst rating is. When I discuss the subject of analyst ratings with folks who are newer to the market, I tell them not to focus on the rating, as much as how they think that the rating will be percieved. In this case, Can we pay our bills? Sure. Will we? Always after much arguing.

    The biggest problem with the ratings drop is meeting the requirements of large institutional investors. I used to place trades to roll $5M blocks of commercial paper for an insurance co. owned non-bank entitiy. To invest those funds, the paper had to have a minimum rating of AA or higher. So how does this rating change impact the market? We had a bond run up right after. Big deal. At the end of the day, it's all much to do about nothing.

  • Report this Comment On August 22, 2011, at 9:25 AM, Brent2223 wrote:

    "the most important metric when measuring a debt load is not the total amount of debt, but the cost of carrying that debt"

    Sounds like a pitch for an interest only mortgage, how did those turn out again?

  • Report this Comment On August 22, 2011, at 9:31 AM, cmfhousel wrote:

    ^ Different because homeowners have a terminal date. Countries don't.

  • Report this Comment On August 22, 2011, at 5:56 PM, SFAmiler wrote:

    Correction....homeowners have a defined terminal date.

  • Report this Comment On August 22, 2011, at 6:04 PM, whattadolt wrote:

    I heard something interesting the other day. It appears that Standard & Poor's is owned by McGraw Hill. McGraw Hill's CEO - Terry McGraw is a huge Mitt Ronmney supporter. Who benefits from Obama looking bad due to an S&P downgrade??...hmmm I wonder.

  • Report this Comment On August 22, 2011, at 9:46 PM, NOTvuffett wrote:

    Morgan, I hope you realize I am not being adversarial for its own sake, I just have a disagreement with your hypothesis.

    Al Gore made a big show about talking about the SS 'lockbox'. There is no such thing. I wish I could find the video and I would say 'he sounds like a gay robot', lol. Then I would be accused of being homophobic, a neo-luddite and anti-mechanoid, lol.

    The SS 'trust fund' consists of nothing except a file cabinet of IOU's. I am not trying to make this a partisan issue, the SS funds have been running surpluses for decades and they just spent it and wrote IOU's. THERE IS NO MONEY THERE.

    If interest to SS doesn't matter then increase it to make it solvent. Hell, let's make everyone a millionaire, lol.

  • Report this Comment On August 22, 2011, at 10:01 PM, cmfhousel wrote:

    ^ There's no cash in the SS Trust. There is, however, Treasuries. Those Treasuries are included as part of the national debt. The Treasury pays interest on those Treasuries, which is used to help fund SS benefits -- although this is simply moving money from one govt account to another. Thus, the relevant stat when talking about interest paid on the national debt, as it pertains to costing taxpayers, is net interest.

  • Report this Comment On August 26, 2011, at 12:50 PM, wheelsucker1 wrote:

    Isn't this the same outfit that gave AAA to CDOs?

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