America’s Fiscal Time Bomb Ticks Even Louder

livemint.com:

“Everybody who reads the newspaper knows that the United States has a very serious long-term fiscal problem." That wasn’t a quote by some financial talking head in the aftermath of Fitch’s downgrade of America’s credit rating on Tuesday. It was a reaction by then Chairman of the Federal Reserve Ben Bernanke the last time a major rating agency took that action back in August 2011. Investors could google hundreds of such warnings over the decades and conclude that the hand wringing is best ignored or even viewed as a buying opportunity.

For example, a funny thing happened when Standard & Poor’s shocked the financial world 12 years ago: Stocks plunged, getting close to an official bear market, yet investors rushed to buy bonds, the very thing that had supposedly become more risky. Stocks remained unsettled for another couple of months, but an 11-year bull market marched onwards. Investors are drawing false comfort from the past and from the perception that fiscal scolds have cried wolf so often.

True, Treasurys remain the most liquid, coveted asset on earth and the risk-free bedrock off of which everything else is priced. And, aside from the temporary plunge in stocks back in 2011, America’s fiscal excess has rarely been an immediate pocketbook issue for its citizens. Fitch’s warning comes at a time when it is getting harder to ignore, though.

Ironically, it was the 2008-09 financial crisis and the emergency response to the Covid-19 pandemic that both accelerated that reckoning and also helped to delay the pain. In 2007, the Congressional Budget Office projected that federal debt held by the public would fall to about 22% of gross domestic product in a decade. In 2011 it was seen reaching about 76% by this fiscal year.