Riskier Than Ever?

I’ve posted previously about scenarios in which secession becomes a practical option for some states. I’ve suggested that when the brand name goes to crap, the costs of defending it get large, and the other costs and conditions pressure the organization, then the whole thing (even a whole country) can come down in a hurry. As my friend Mark Pixley once said when I asked about the future of China, where he lives: “A country’s only a country because we say it’s a country.” And we only do that as long as it “pays.”

Today, I find this in DailyReckoning for 09-Nov-04, quoted from The Wall Street Journal:

“In a development that underscores the growing concern over America’s twin deficits, some investors and analysts are starting to question the unquestionable: The U.S. government’s Triple-A bond rating.”

They are anxious about years of budget and trade deficits. Their fears have been compounded by a weakening dollar and looming questions about how the United States will pay for Medicare and Social Security, as scores of baby boomers start retiring.

To suggest that the United States is a Triple-A credit, “would be to suggest that it can pay its bills over a long period of time in a stable currency,” says William Gross, chief investment officer at Pacific Investment Management Co., or Pimco, which runs the nation’s largest bond mutual fund. “That is no longer true.”

Now to understand what this really means, please notice that the value of EVERY financial asset in the world is calculated based on a “risk-free” rate plus a risk premium. The benchmark for risk-free has always been US Treasuries. Not only does this shake up and confuse the value of every financial asset on the planet, but if the perceived risk of US treasury securities rises, so too does the cost of the interest payments required. Lump this on top of already mounting healthcare, defense, education, etc. costs… and it starts to look like a GIANT Arthur Andersen just waiting to happen.

The good news is that much of the accounting that AA used to do is still being done by somebody, and most of the accountants once employed there, are now doing some sort of accounting work, somewhere. It’s just the transition that gets pretty dicey. In God (not dollars) We Trust.