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
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
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.
