Dagong Global Credit Rating Co., Ltd.
January 16, 2018
Dagong Global Credit Rating Co., Ltd. (“Dagong”)has decided to downgrade both the local and foreign currency sovereign credit ratings of the United States of America (hereinafter referred to as "the United States" or “the US”) from A- to BBB +, and each with a negative outlook. The perennial negative impact of the superstructure on the economic base has continued to deteriorate the debt repayment sources of the federal government, and this trend will be further exacerbated by the government's massive tax cuts. The increasing reliance on the debt-driven mode of economic development will continue to erode the solvency of the federal government.
The main reasons for downgrading the sovereign credit ratings of the United States are as follows:
1. Deficiencies in the current US political ecology make it difficult for the efficient administration of the federal government, so the national economic development derails from the right track. Under the political ecology which is built by the factional rivalries, factional interests are prioritized, and it is hard for the government to focus on the management of the national economy and social development. Therefore, the national economy is highly debt-driven. Nevertheless, the government did not discover from the financial crises that it is the debt-driven mode of economic development that has hindered the country from making ends meet. Instead, it continues to seek credit expansion through direct issuance of the US dollars, therefore serves as the “track walker” on the wrong track that departs from logic.
2. The distorted credit ecology that violates the law of value leads to the abnormal solvency of the federal government. Capital’s desire for profits makes the financial sectors of the United States strive for more profits through continuous expansion of the chain of credit transactions by designing capital products and trading structures, and the virtual value-added model of capital self-circulation that runs out of the real economy provides living space for the ever-blooming debt bubble of the federal government. The government has formed a virtual solvency by increasing new debts in the name of the United States through abusing the right of issuance the US dollar as the international reserve currency. Therefore, the distorted credit ecology has made the federal government's abnormal solvency become its derivative product.
3. Massive tax cuts directly reduce the federal government's sources of debt repayment, therefore further weakens the base of government's debt repayment. The tax cuts act implemented from 2018 did not attack the root cause of the unsustainable debt-driven economy of the US, so it is projected that the US economy growths only 2.3% in 2018, and would grow even more slowly in the years after. Besides, fiscal revenue of the federal government will keep declining due to the tax cuts, so it is projected that the fiscal revenue to GDP ratio will fall to 14.0% in 2022, a 3.3 percentage points down from that of 2017. The rising demand for national defense, infrastructure and rigid spending will made it hard for the federal government to reduce fiscal expenditure effectively, thus it is estimated that the fiscal deficit of the federal government in 2018 and 2019 will rise to 3.9% and 4.1% respectively.
4. Using the rising debt to make up for the fiscal gap brought by the tax cuts will inevitably increase the credit risk of the federal government. The financial gap and the pressure to repay maturing debts raise the financing needs of the federal government. It is estimated that ratio of fiscal revenue-to-debt of the federal government will be 14.9% and 14.2% in 2018 and 2019 respectively, and the ratio will deteriorate to 12.1% in 2022. The government will then have to raise the debt ceiling frequently. In addition, the government’s realizable assets-to-debt ratio is merely 7.3% in 2017. That is to say, the government cannot stay solvent relying solely on its realizable assets and it has to resort to debt monetization to maintain the balance between repayment sources and debt. However, interest rate increase and balance sheet reduction of the Federal Reserve raise the cost of finance through debt roll-over. Thus to roll over debts is unsustainable.
5. The virtual solvency of the federal government would be likely to become the detonator of the next financial crisis. The serious imbalance between the sources of debt repayment and liabilities makes the federal government the weakest link in the US debt chain. Taking the advantage of its right to print money, the US strives to maintain its solvency by purchasing treasuries with newly-printed dollars, which, in itself, is a debt crisis. The market's reversing recognition of the value of US treasury bonds and US dollar will be a powerful force in destroying the fragile debt chain of the federal government.
Debt economy model determined by US political system, strategy and economic base will not change; tax cuts have increasingly adverse effects on the government’s repayment sources; continuous reduction of fiscal revenue and increase of debts show that the government’s repayment ability is weakening. Hence, Dagong holds a negative outlook for both the local and foreign currency sovereign credit.