Think The U.S. Credit Rating Can’t Be Downgraded?

Many people snicker at the idea the national debt could end up downgrading the credit rating of the United States. To those people, I say one thing – Japan.

Japan is an economic giant like the United States. Whereas we currently have a debt level equal to roughly 70 percent our gross domestic product, Japan’s is at nearly 200 percent its GDP. Despite this, Japan retains its strong economic ratings…or at least it did.

Japan has just been downgraded to a AA- rating by Standard & Poor’s. This is a huge development. The down grade in credit is indicative of rising risk. Rising risk, of course, means higher rates to be paid by the debtor. Given the size of Japan’s debt, this could turn into a feedback loop where payments grow higher, which forces the debt higher as well. Is it any wonder Japan has suffered through the lost decade?

The United States faces similar problems. The reported national debt is $14.1 trillion. In truth, the figure is more like $111 trillion when money due to Social Security, Medicare and similar entitlement programs are figured in. Even worse, the total debt of the feds, state and local governments combined is equal to about 96 percent of the GDP.

The gross domestic product of the United States is about $14.6 trillion a year. Think about that for a second. Our unfunded liabilities are about $111 trillion. This means we are carrying uncovered debt levels equal to nearly 750 percent of our GDP. That makes us nearly 3.5 times worse than Japan.

Can our credit rating be cut? Oh, yes.

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