Weiss Ratings has just downgraded the debt of the United States government to a C-minus — approximately equivalent to a BBB- rating by S&P, or one notch above speculative grade (junk).
This is critical for you.
As I’ll explain today, regardless of the outcome of the debt debate now raging in Washington, few will escape the far-reaching consequences of America’s unfolding debt disaster.
No matter what assets you own, and no matter what country you live in, the impact on your finances could be huge.
You ask: How can this actually be happening in America? Isn’t the United States still the world’s largest economy, the dominant superpower, and the issuer of its primary reserve currency?
Yes, it is.
But it’s precisely because of America’s unique strengths that Washington and Wall Street have been able to spend, borrow, and assume financial risks that are actually greater than those taken by any other major nation on Earth.
I’ll name those risks for you in a moment. But first …
Here’s Why We Downgraded the U.S.
This saga begins over one year ago, when Weiss Ratings publicly challenged S&P, Moody’s, and Fitch to downgrade the debt of the United States government. (See Weiss Ratings press release of May 10, 2010.)
“By reaffirming the government’s triple-A rating,” we wrote, “the three leading rating agencies help entice savers and investors to pour trillions more into a potential debt trap or, at best, to be severely underpaid for the actual risks they are taking.
“The rating agencies give policymakers a green light to perpetuate their fiscal follies, further degrading our government’s ability to meet future obligations. And they help create a false sense of security overall.
“Recognizing and confronting our nation’s financial troubles with honesty is the necessary first step toward solving them.”
But in the months that ensued, despite continued rapid deterioration in the nation’s finances, S&P, Moody’s, and Fitch failed to budge.
We waited patiently. But after waiting nearly a year, we could wait no longer: On April 28, we launched our own Sovereign Debt Ratings, assigning the U.S. a C (fair) — a grade that we feel is the first to speak the truth about America’s financial mess. (See press release.)
The reaction from the media was swift and sharp. The Wall Street Journal and Barron’s reported that the Weiss Rating on Uncle Sam is a mere two notches above “junk” status. Fortune expressed shock that we ranked America below some smaller countries. Virtually everyone in the mainstream press — and in government — seemed to think that the Weiss Ratings was rash, radical, or both.
But now, as the debt debate rages on, some are finally beginning to wake up to the true magnitude of America’s financial disaster — the massive size of the federal deficit, the uncontrollable nature of entitlements, and the extreme political resistance to meaningful change.
S&P and Moody’s have finally put the U.S. on credit watch. The Fed Chairman has warned of financial Armageddon. And some in the media are now shouting from the rooftops the same warnings we were issuing over a year ago.
On the surface, the primary source of their fears is the immediate chaos that would be triggered if the U.S. defaults on August 2, just 15 days from now.
But behind the scenes, many have also begun to recognize that …
Even if the immediate debt ceiling crisis is resolved to everyone’s apparent satisfaction, it could be just a dress rehearsal for the true tragedy of a nation unable to end its own financial decline any more effectively than a Greece, Ireland, or Portugal. (For our paper outlining this view, see Introducing the Weiss Sovereign Debt Ratings.)
How is this possible? How can the mighty United States be on the same wayward path as countries that are so much smaller and less powerful?
Here are the hard facts:
Among the 49 sovereign nations Weiss Ratings covers, the U.S. has one of the heaviest debt burdens, the weakest international reserves, and the least stable economies.
It’s more dependent on foreigners for deficit financing than any other major country in the world.
Its consumers are among the most reliant on mortgages, credit cards, and other forms of debt to support its economy.