So apparently, the United States’ Federal government credit rating was downgraded and everyone is flipping out and blaming external causes for the problem. Regardless of who is to blame, everyone seems to fail to comprehend the real issue which caused the S&P downgrade in the first place: the size and magnitude of the Federal government’s debt.
When you become an adult, the banking system sees fit to keep a close eye on your borrowing practices via the various credit rating agencies (TransUnion, Equifax, and Experian). They collect your borrowing history as it is reported from the various official lending institutions and create a comprehensive report on it. They also create a credit score based on four factors. This is called the FICO score, based on the analysis done by the Fair Isaac Corporation. They have four factors that go into your credit score:
- How you pay your bills (35%) – Paying your bills late affects this aspect greatly. So over one-third of the calculation is based on your payment history.
- Amount of money you owe and the amount of available credit (30%) – By and large, if you have a large amount of debt or a large amount of credit, then you are considered riskier.
- Length of credit history (15%) – The longer you are in the credit reporting system, the better off you are.
- Mix of credit (10%) – Having a diverse credit portfolio will be a factor here. You cannot have just credit cards or just a mortgage, but a combination of those two plus a few other things in order to raise the value here.
- New credit applications (10%) – You interest in new credit is a an odd factor. Apparently, getting new debt is considered a plus.
This is how American citizens are rated for their credit worthy status and it seems like a fair system, considering that credit is a product that is packaged and sold to the average American like it is some kind of wealth builder (it is not). But what were to happen when we apply these standards to the United States Federal government (note that these views are subjective as they are based on my own observations):
- I would give the United States government a high ranking on their bill repayment, in that they have managed to pay the interest consistently. However, they have not been all that concerned with paying off the existing debt. 25%
- While their available credit is potentially unlimited, it is clear that the United States Federal government owes too much given the amount of tax revenue which comes in every year. 0%
- The United States has been in debt for over two centuries. 15%
- The debt the United States Federal government has held has never been all that diverse, usually just in the form of bonds. 0%
- The United States Federal government has always been no stranger to acquiring more debt, especially considering last month’s farce of debate over the debt ceiling. 10%
Since Fair Isaac Corporation has their credit score formula hidden away, I am going to assume that 1000 points is the highest that an entity can have. The total percentage of the five factors is 50%. And thus, the Federal government’s overall rating credit score is: 500.
Given this, I would suggest that the AA+ rating from S&P is too generous. If anything, the government debt should have been downgraded much, much sooner, like during the Bush administration, maybe even during Clinton’s run. After all, when Bush, Jr. came to office, government debt was about 5 trillion and it was 9 trillion when Bush left office. President Obama has added another 6 trillion in three years, so the mere fact that this did not happen at the beginning of the year is more shocking than the fact that it happened in spite of the debt ceiling deal.
The problem is that the Federal government has borrowed too much and has no desire to stop borrowing. This has nothing to do with political parties, economic theories, or grassroots activists, but everything to do with reckless spending that the political class has engaged in in the past 80 years, starting under President Hoover. The credit rating downgrade is merely the market finally having the guts to tell the tyrant that he is overextended and needs to cut back.
Too bad the political class is too busy blaming everyone else for their own self-inflicted wounds.
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