“Rising Inequality” Could Impact America’s AAA Credit Rating

Moody’s: It “will exacerbate already material fiscal challenges on the horizon.” If unaddressed, “social tensions will continue to rise.”

By Fred Dunkley, Safehaven.com:

Credit-analysis firm Moody’s Investors Service is sounding the alarm bells over “rising inequality” as the gap widens between America’s rich and poor, potentially threatening the country’s AAA rating.

So much for that vision of a newly emboldened American working class …

Instead, Trump’s $1.5 trillion in tax cuts, according to Moody’s, have helped make the rich richer, putting more of the onus of repaying the country’s debt on the poor.

“Since 1995, the top 10% of US income earners have experienced an overall median net worth increase of close to 200%, while the bottom 40% of income earners have seen a decline. There has been a particularly sharp increase in wealth and income inequality ratios since the global financial crisis,” Moody’s noted in a report released on Monday.

“The global financial crisis exacerbated the effects of these trends by disproportionately affecting poorer overleveraged households and by reducing the mobility of households with negative home equity and, oftentimes, negative net wealth as a result,” says Moody’s Vice President William Foster. “Wealthier households with a higher concentration of equity market holdings in retirement savings plans and personal portfolio investments have disproportionately benefited from the significant gains in the US and global stock markets since the global financial crisis.”

In turn, that rising inequality “will exacerbate already material fiscal challenges on the horizon,” Moody’s continued. “Should inequality go unaddressed, social tensions will continue to rise, leading to a more fractious political landscape that increases political risk, and with it a less predictable policy environment.”

But it’s not just about taxes, either. Everything from globalization, automation, technological advancements requiring advanced job skills, elevated premium on education and the increasing costs associated with education have played a role in widening inequality.

So what does it mean for the U.S.’ AAA rating? According to Moody’s Vice President William Foster, the widening gap between rich and poor is a threat, but the U.S. government, of course, has other aspects supporting the rating—at least in the medium term (2-5 years). Chief among them is the debt denominated in dollars.

Still, Moody’s cites rising inequality as the U.S.’ weakest rating factor. Why? It’s simple math: The wider the income gap becomes, the more the government will have to spend in order to support lower-income households. These costs, Moody’s notes, “are unlikely to be offset by revenue raising measures following recent tax cuts”.

At the end of the day, even though the economy is chugging along nicely—nicely enough, in fact, for everyone to ignore rising inequality that will contribute to widening fiscal deficits and a growing debt burden.

The credit-ratings agency is also concerned about the “increasingly less predictable policy environment” and the potential for an even “more fractious political landscape” as a result of rising inequality.

Writing for The Hill, Scott Sumner, emeritus professor of economics at Bentley University, notes that the reason median wages have lagged behind GDP growth is that “more of the pie is going to workers at the top, in places such as Wall Street, Silicon Valley and Hollywood”.

But the U.S. is the only place where rising inequality is becoming alarming, of course. However, Moody’s notes that the extent of that inequality is greater than that of developed European economies. The credit-ratings agency said the U.S. “stands out for particularly high inequality”.

*Gini coefficient tracks the distribution/concentration of a country’s income. 0 is when everybody has the same income; 100 when one person has all the income.

The biggest threat then to the U.S. credit rating is inequality that Moody’s fears will further polarize the country. By Fred Dunkley, Safehaven.com

But wait — these are the Boom Times! Read… US Gross National Debt Jumps by $1.27 Trillion in Fiscal 2018, Hits $21.5 Trillion

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  33 comments for ““Rising Inequality” Could Impact America’s AAA Credit Rating

  1. Sporkfed says:

    It’s a little late now.

    • Gershon says:

      The former middle class continues to be pauperized and hollowed out as the Fed’s monetary policies concentrate all wealth and power in the hands of its oligarch cohorts.

      • HowNow says:

        The Fed isn’t the problem. The wealthy, who, through the GOP and even through the Dems, continue to increase their wealth and reduce their tax burden. That is the PROBLEM. If you ignore that, read what Pikkety describes in great statistical detail in his book, “Capital”. If you ignore that, you are among the proud country folk in the red states who have some fantasy that a guy like D. Trump is looking out for THEIR own good. Like… why not open casinos to help the poor?? Some just love their celebrities. But keep blaming it on the Fed… You’ll get lots of nods. Check out Pikkety’s charts. After the Great Depression, the wealthy never lost their proportion of wealth. But from Reagan on, their proportions keep rising. Now, about 50% of Americans have no assets.

  2. makruger says:

    Gee, and I thought all this time being poor was simply the result of one’s own moral failings. BTW…perhaps you really meant 1.5 Trillion in tax cuts?

  3. Crysangle says:

    Why does the choice always seem to be between having the gini at 0 but no wealth, or at 100 with still no wealth except for one person?

    I think there should be another coefficient, the nabay (not as bad as you) , which measures only how well off you are compared to people worse off than yourself. It’s great, you only ever come out top (except for one unfortunate soul somewhere, but he will usually soon get sympathy from someone) . People caught gloating automatically get transferred to the botp coefficient ( bottom of the pile), where they only get placed according to those better off than themselves. It’s a good system and has worked well throughout history.

    Finally, people who actively try to push others further down the scale get transferred to the foh (flames of hell) coefficient, which is actually a kind of thermometer, but I won’t explain how that works here.

  4. raxadian says:

    “I told you bro, I told you tax cuts made everything worse.”

    “I can’t hear you, I am swiming in money!”

    But of course people always ignote tax cuts are not real tax cuts but tax redirection. The money hs to come from somewhere after all.

  5. Setarcos says:

    With income inequality being a leading cause of increased risk leading to a lower Moodys credit rating, then could you provide any income inequality stats on Venezuela and Cuba for comparison?

    • Mike G says:

      Read the article. There are plenty of comparable Western countries with less inequality for comparison.
      There’s no suggestion that inequality is the one and only factor determining credit ratings.

  6. Bridgetown Beast says:

    I was pretty sour on old Moody after the fracas where they were caught taking bribe- er, fees, for favorably rating subprime synthetic mortgage-backed derivatives so that they could be fed to hapless pension funds, but honestly they seem to have hit the mark on this one. The hollowing of the U.S. has major implications for the world economy, which to me seems to comprise mostly mercantile nations, those who take credit to buy their goods and services and the hapless central banks of developing economies who can’t Kickstart their economy without borrowing in dollars to pay protection money to the mobsters in the IMF. Wolf, considering that the U.S. has shown little restraint in using military intervention to shore up their access to resources in the past, what could a downgrade portend for global stability?

  7. Alan says:

    Basically, “screw the workers, we’ll be outta here before they realize what’s happened.” Look at Kodak who had the CCD chip inthe 1970s that they suppressed to continue their hegemony in film and photographic paper. Also hedge fund screwed ToysRUs, etc. How many iterations of this can occur before we’re Argentina?

  8. Gershon says:

    Ever since it’s clandestine 1913 establishment by the robber barons of the era, the Federal Reserve, aka The Creature from Jekyll Island, has served as the oligarchy’s chief instrument of plunder against the 99%. Since the late 1990s, Greenspan, Bernanke, and Yellen have dramatically expanded the scale of the Fed’s swindles against the increasingly hollowed-out middle and working classes with engineered boom-bust cycles that enabled the transfer of the latters’ wealth and assets to the Fed’s Wall Street investment banker accomplices, including millions of foreclosed houses snapped up at distressed prices using trillions in printing-press FedBux – debasing the purchasing power and savings of the proles in the process. The pending bursting of the Fed’s Everything Bubble will be the latest iteration of this process, and the most successful swindle against the 99% to date. Maybe this time around We the People will finally be angry enough to do what Ron Paul urged us to do back in 2008: end the Fed and restore the Republic.

  9. Anon1970 says:

    The US has not behaved like a responsible borrower for a very long time. One could start with the way the Viet Nam war was financed, or the closing of the gold window (1971), or the Reagan tax cuts, or Bush 43’s Middle East wars and two tax cuts. Moody’s has decided to sound the alarm only after the Trump tax cut, but has still not lowered the US debt rating. S&P went out on a limb in 2011 with an actual cut to AA+. My guess is that if you buy a 10 year US government bond today, you will probably get your interest and principal back on time. But how much will it buy? Germans who bought their country’s 10 year bonds in 1913 found that it didn’t buy very much at all when the bonds came due in 1923.

  10. Setarcos says:

    Moodys, the same company that rated the toxic MBS a decade+ ago.

    A few years ago, I asked one of their leading economists about getting back to 4% gdp growth – he laughed and said we would never see 4% again.

    Sorry, but Moodys credibility is suspect.

    • Wolf Richter says:

      Real GDP in Q2 was up 2.9% over the 12-month period. For the year 2018, real GDP growth will be a little over 3%, and not anywhere near 4%. This chart show the 12-month growth rates of GDP.This is the rate Moody’s economist that you asked was talking about:

      The only time 4%-plus shows up in real GDP growth is when a quarter-to-quarter growth number is multiplied by 4 to annualize it, which is how this is reported in the US. This is a very volatile way of showing it. As you can see in the chart below, 4%-plus has happened in Q2 under Trump, but it has also happened 4 times under Obama. Nothing special there, just a very volatile way of showing GDP growth:

      • Setarcos says:

        Agreed and I suspect he prove to be correct after all …the many years of ZIRP are quickly fading into the distance. Our conversation was a little deeper than indicated, but trying to be brief. At the time, which I am guessing was 2013, we were <3% and he was saying this was as good as it gets. It was fascinating to watch the economy be too weak to move beyond ZIRP year after year. I was frustrated with his response. Honestly, my memory may be off … I may have asked if we could ever get to 3% on a sustainable basis.

  11. RangerOne says:

    Quite the pickle. Who would have thought a bunch of tax cutting Republicans led by a celebrity billionaire would continue to fuck up inequality?

    Obama and rank and file dems did virtually nothing to bolster the parts of the middle class that were collapsing.

    If a left wing socialist ever wins the white house maybe we will actually see a bipartisan Congress fight to keep their anti corporate policies from seeing the light of day.

    • Setarcos says:

      RangerOne, it has been a race to the bottom for quite a while …anyone claiming high ground in promoting equality is delusional.

      A particularly unjust form of inequality (and tyranny) is trying to force unequal things to be equal. Let’s clarify with an example. If someone has invested in developing their job skills, their wage should be much higher than someone who has not bothered to even finish high school (almost 4 out of 5 don’t). If their reward is higher taxes, which are then passed along as subsidies to the dropout, what happens over time?

      The current strategy is to grow out of the pickle. Risky, but not sure what the alternative is. Higher taxes? Apparently the Fed is taking this very seriously now after years saying the economy was too weak to move beyond ZIRP.

      • Wisdom Seeker says:

        Almost 4 out of 5 don’t finish high school? do you seriously believe that, or was that a typo?

        • Setarcos says:

          Approx. 4 out of 5 complete high school. It was a typo. thanks for pointing it out

  12. theodore m kumlander says:

    Pay off the debt? I still chuckle when Politicians say we are leaving the debt for our grandchildren to payoff .No generation will be able to pay off that amount of debt.

    • Wisdom Seeker says:

      Actually it can be done, if there’s a will.

      US debt/GDP was as high in the late 1940s as it is now. It took 30 years but they brought it down from 120% of GDP to about 35% of GDP.

      The British under Queen Victoria did the same.

  13. Crazdy says:

    Over the centuries, I’m sure the bankers learned the hard lesson that its a bad deal to make big loans to the people in the castle just before the peasants arrive with pitchforks and torches to burn down the castle.

    • Unamused says:

      Nobody’s home, so good luck with that. They’re in their guarded enclaves in NZ and they aren’t going to let you in on a jetliner with proletarian hardware, and it’s a long way to swim.

      Modern finance makes me cynical. Maybe I should sell.

  14. Suppose if some measure of dollar reduction is deployed (aka Plaza Accord) that the rating would take a dip. This seems like a done deal to me. Any idea how the credit ratings break down state by state?

  15. Unamused says:

    Why should the ultrarich care about the US credit rating? They’ve rigged the game so they get richer regardless of any outcome. Even if their victims get huffy about it they can simply retreat to their enclaves in New Zealand until the machineries of repression smooth things over.

    If this is a joke I’m going to need it explained to me, but it smells like more phony handwringing.

  16. THE QUEEN says:

    Qu’ils mangent de la brioche

    About time “muh goberment” stopped supporting populations and let fair pricing come into play.

    Does everyone forget the A++ downgrade from S&P so fast.

  17. Wisdom Seeker says:

    Whenever I hear someone claim “it’s simply math”, I look for the BS… And I abhor bias-driven false dichotomies like this one:

    “It’s simple math: The wider the income gap becomes, the more the government will have to spend in order to support lower-income households. These costs, Moody’s notes, “are unlikely to be offset by revenue raising measures following recent tax cuts”.”

    As though the only two options the government has are “spend more to support lower-income households” and “raise taxes” !!! As though a widening income gap is a law of nature, not a policy consequence in itself!

    There are many, many more options. Someone hit Moodys and the 538 in DC with a clue brick!

    • Unamused says:

      ->There are many, many more options.

      Mostly puts and calls which will do nothing to improve the situation.

      The situation appears to be so far gone that it seems that all the sacrifices made in the US Civil War and the two World Wars may have only delayed the inevitable. There may be no wisdom there to seek, and certainly none with seven pillars.

      Please excuse me while I go trim my hedges. So to speak.

  18. mvojy says:

    The upper personal income tax brackets should be raised as income inequality rises. It would encourage the wealthy to share their wealth one way or the other.

    • Unamused says:

      Who’s going to enforce it? Or are you still counting on voluntarily compliance?

    • Weary Patience says:

      A lot of super high paying positions in companies these days come from stock grants/options/market instruments vs traditional salary. Would need to increase capital gains taxation to prevent the “My salary is only $1” (but I sell off $10m in stocks each year at a reduced 20% tax rate) scam that’s developed.

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