Moody’s Warns U.S. Sinking into Financial Abyss

Moody’s Warns U.S. Sinking into Financial Abyss
By Bill Wilson

“A national debt, if it is not excessive, will be to us a national blessing.”—Alexander Hamilton.
Not even Alexander Hamilton would support today’s national debt.

When the nation’s system of perpetual, permanent debt was enacted, it provided, according to American Public University’s History Central, “that the debt be funded by reissuing bonds to be paid back in full after 15 or 20 years. Thus, rather than eliminating the debt, Hamilton's plan created a large, permanent public debt, issuing new bonds as old ones were paid off. Congress approved this proposal.”

More or less, that’s the system that still exists today. Paying off the principal on the national debt is done almost entirely by the issuance of new Treasury bonds. And, per Hamilton, “if it is not excessive,” can be indispensable — in times of war, for example.

For now, the nation is able to sell new bonds to pay off the old. Since the national debt has grown every single year since 1958, however, that means annually, for more than 50 years, more bonds have been sold than have been paid back. This has thus resulted in a net increase of the debt every year, even when Congress supposedly “balanced” the budgets in 1969 in and in 1998.

Interest servicing the debt, on the other hand, comes out of revenue. This is where it gets interesting — and downright scary.

The U.S. is about to max out its credit card while barely keeping up with its minimum payments servicing the nation’s gargantuan $12.4 trillion mountain of debt. Yesterday, Moody’s Investors Service again warned the U.S. that it is “substantially” closer to having its credit downgraded.

As reported by Fortune’s Chris Barr, “interest payments on general government debt -- combining the federal government with the states -- could rise above 10% of revenue by 2013... That's the level at which the rating agency typically considers a downgrade. Moody's said debt affordability is the key factor to consider in ratings decisions, because debt costs are apt to constrain policymakers…”

This is a critical point. Why?

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