Fitch Warns U.S. Debt Threatens Economy

by John M. Curtis
(310) 204-8700

Copyright June 27, 2013
All Rights Reserved.                                      

              Affirming that the U.S. credit rating remains AAA, Fitch Ratings warned that the economic outlook was still negative, warning that high debt hurts the nation’s long-term outlook.  “The outlook remains negative due to continuing uncertainty over the prospects for additional deficit-reduction measures necessary . . . over the medium and long-term,” said Fitch’s report, proving, if nothing else, that credit-rating agencies—like S&P—often get economic wires crossed.  Fitch sees problems on the horizon with the Federal Reserve Board Chairman Ben S. Bernanke announcing June 19 that he could start tapering bond purchases by year’s end.  Since Bernanke’s remarks, the 10-year Treasury Bond has risen nearly one percent, causing long term mortgage rates to jump nearly two percent.  Fitch both warns about long-term U.S. debt and the possibility of the Fed tapering its $85 billion a month QE3.

             Fitch warns about higher U.S. debt causing economic uncertainty but, at the same time, knows that without Fed intervention the economy would have double-dipped into recession.  When former Fed Chairman Alan Greenspan said the 2007-08 economy collapse was the “mother of all recessions,” Beranke knew the economy would require emergency CPR in the way of the federal bond-buying program known as QE1, QE2 and now QE3.  When President Barack Obama ran against Sen. John McCain (R-Ariz.), the GOP staked the election on opposing QE1, or other forms of government bailouts.  Voters gave Obama a hefty victory believing that Fed intervention—both in terms of historically low interest rates and government bond-buying—were needed to climb out of the Great Recession.  McCain and his running mate former Alaska Gov. Sarah Palin wanted to let GM and Chrysler go bankrupt.

            Fitch mirrors the same schizophrenic logic of (a) opposing Fed intervention and (b) believing, without it, the economy would lapse into recession.  “Near-term risks associated with the expiration of federal appropriations authority at the end of the current fiscal year,” said Fitch, clouds the economic outlook.  Fitch refers here to the GOP-imposed “fiscal cliff,” where mandatory government spending cuts went into effect Jann 1 to reduce federal budget deficits.  Fitch knows that the steady reduction in the unemployment rate has dramatically reduced the deficit from $1.4 billion in fiscal 2010 to the Congressional Budget Office’s projection of under $500 billion.  Citing “extraordinary exchange rate flexibility,” Fitch sees the dollar’s global reserve currency and liquidity of major U.S. banks as contributory factors in continuing to grow the U.S. economy going forward.

             Bernanke’s low-interest rate and bond-buying programs have contributed mightily to the current economic growth.  When the U.S. Q-1 Gross Domestic Product was downgraded June 26 to 1.8% it was a wakeup call to all the Fed skeptics that urged less intervention.  With all the Fed’s stimulus, the nation’s GDP still teeters on double-dip recession.  Greenspan noted June 7 that that rising stock markets are necessary for long-term economic recovery.   When Bernanke flinched about QE3, the Dow Jones Industrial Average dropped about 1,000 points or 7.5%.  Here’s where Fitch and other rating-services go off the rails.  “Fitch’s current assessment is that the economic recovery is gaining traction as headwinds from private sector debt de-leveraging ease.  This is underpinned by a pick-up in the housing market and gradual decline in unemployment,” said Fitch’s report.

             Without QE3, long-term interest rates would rise to levels that would kill the fragile and uneven housing recovery.  Rising borrowing rates have already dented the refinance market and threaten new and existing home purchases.  Unemployment is almost always dependent on a rising stock market, where publicly-traded companies feel confident about cash-reserves to hire full-time, permanent employees.  Most traders sent out sell signals when Bernanke dared to suggest the economy was healthy enough to taper QE3.  With Bernanke’s term set to expire this Fall, Obama had better pick a like-minded Fed Chairman or risk corporate layoffs, higher unemployment and rising long-term interest rates—all will plunge the U.S. into a double-dip.  Given recent blips in stock and bond markets, the economy needs the Fed’s steady hand to continue the current economic recovery.

             Fitch’s complaints about Fed intervention mirror the same ambivalence of GOP economists that think the economy must crash before it can eventually reinvent itself.  Without Bernanke’s aggressive Fed actions, the economy would be stuck in the same vicious cycle that plagued former President Jimmy Carter in the late 1970s.  While inflation was the Fed’s No. 1 problem then, the problem now is how to stimulate the economy enough to generate more jobs and continue the housing recovery.  Bernanke’s QE3—while artificial—is just the right elixir for more a sluggish economy.  Had Obama not bailed out GM and Chrysler and Bernanke not launched his bond purchases, the economic would have stalled out, damaging the housing market and auto industry.  Instead of criticizing the Fed’s practices, credit-rating agencies like Fitch should give the Fed more credit.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.