Stupidity At Moody's: Get Rid of Debt Ceiling and We Won't Downgrade Your Debt
In the midst of staggering illogic surrounding our debt ceiling, ratings agency Moody's just raised the bar.
On Monday, it announced that the United States could increase its creditworthiness by - wait for it - eliminating the debt ceiling altogether:
The United States is one of the few countries where Congress sets a ceiling on government debt, which creates "periodic uncertainty" over the government's ability to meet its obligations, Moody's [MCO 36.45 0.13 (+0.36%) ] said in a report.
"We would reduce our assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty," Moody's analyst Steven Hess wrote in the report.
Consider the illogic on display.
An entity's credit rating - whether we're talking about an individual, a household, or a business - is measured by amongst other things the total amount of debt outstanding, the value of the assets owned, and the cash flow generated each year.
If debt outstanding rises without a commensurate increase in assets or cash flow, the creditworthiness drops.
Yet the folks at Moody's are actually saying that in the United States's case, if it were to remove a curb on debt growth, in their view this would increase creditworthiness.
To further demonstrate the inanity, consider the next few paragraphs:
Stepping further into the heated political debate about U.S. debt problems, Moody's suggested the government could look at other ways to limit debt.
It cited Chile, widely praised as Latin America's most fiscally-sound country, as an example.
"Elsewhere, the level of deficits is constrained by a 'fiscal rule,' which means the rise in debt is constrained though not technically limited," Moody's said, adding that such rule has been effective in Chile.
It also cited the example of the Maastricht criteria in Europe, which determines that the ratio of government debt to GDP should not exceed 60 percent.
So, on the one hand, Moody's wants America to officially "limit debt" citing other countries that are doing a better job of it.
But if the U.S. got rid of the only legislative mechanism it currently has to accomplish this, the ratings agency would see it as a good thing.
That's akin to fearful residents in a community inhabited by a known child molester hoping his LoJack is removed.