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FT Highlights What I Believe is the Next Big Threat: A U.S. Downgrade

February 5th, 2010 Michael McDonough

“Unless further measures are taken to reduce the [U.S.] budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating,” -Moodys

This quote came from a note Moody’s released on Wednesday that went largely unnoticed by investors.

You can find the FT Article Here

In order for the U.S. to shift course we will need to see major reductions in spending coupled with an increase in taxes, that will probably resemble that of the 1970’s, where the highest tax bracket went north of 70%.  Today’s growth is coming at a price, which will eventually need to be paid.

I should note that before the financial crisis  rating agencies were releasing reports reaffirming sub-prime assets AAA credit ratings, however, with a caveat.  The caveat was that this rating would be secure so long as there was no decline in home prices.   But, at this point in time you would have been hard pressed to find an economist on Wall Street–even the optimistic ones I was working with–who were not calling for a decline in home prices.  The rating agencies realized the consequences of downgrading these assets, and likely did not want to be known as the spark that caused the biggest financial crisis since the great depression.  Instead they waited until it became completely apparent to everyone that these assets were in no way investment grade (as they subtly alluded to with their caveat) and waited to downgrade until the damage was already done.  It looks like they do not want to repeat this mistake.

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