US is really almost bankrupt and should be rated junk bond status

The premise of this posting is that the US Government treasuries should be rated junk status by the large bond rating firms.  To date only one firm, Weiss Ratings, seems to be close to where the US Government should be rated.   They have them rated C- which is approximately one rank above junk.    Egan-Jones and S&P also rate US Government below the vaulted AAA ranking.

My concern stems from how the rating agencies rate the debt in the first place.  One of their key measures of risk is the amount of debt a sovereign nation has compared to the GDP of that country.  GDP is a measure of the entire income of a country in one year not what the government takes in with regards to taxes or other revenue generating activities.  To me this is plain wrong. 

These same rating companies use a different measure when comparing corporations and municipalities.  When they compare the debt of say a bank to revenue they only use the revenue of the bank they are evaluating and not the entire banking industry.  This massively distorts the debt to income ratio of the sovereign nations and hence artificially inflates rating of sovereign nations.

I have a couple of reasons why I think this is done.

1.       The rating agencies feel that most sovereign nations can raise taxes to help pay their debt thus they can easily raise their revenue making it easier to pay their bills.  To me this is a false assumption on the part of the rating agencies.  How far can a country raise taxes as a percentage of GDP before the GDP plunges?  The US has historically been taxed by the US Government between 15% to 20% of GDP.  Imagine if the US raised taxes to say 40% of GDP.  What would happen?  My guess is the all the 777 and A380 planes flying out of the country would be full of business owners moving to other countries OR tax evasion would become a favorite pastime of the rich like in most third world countries and southern Europe.

2.       Another reason might be that the rating agencies probably cannot get accurate revenue figures on a timely basis or they simply do not trust the numbers they get so they feel the GDP figures are more reliable.  This might be the case but there are enough countries that report these numbers on a regular basis and are quite accurate.  If you cannot trust the government revenue numbers you probably cannot trust their GDP figures either.  This is most likely not a valid reason.

3.       They might do it because it is simply easier to get (i.e. the agencies are being lazy).    This is probably not the reason but you never know.

4.       Finally they might have been misled by governments a while back using reason 1 and nobody has challenged them to make a change now that information is easier to get.  This to me might be the likely reason.

I do not know what the reason is officially but I believe it is plain wrong.  To show this point further I will compare an AAA corporation, a junk rated corporation, and the US government simply just using debt to income ratio.  You be the judge.

Company/Country	ExxonMobil	Charter Communications	US Government
Rated by most agencies	AAA	BB-	AAA, AA1
Last complete year Income	$383,221,000,000	$7,059,000,000	$2,161,700,000,000
Last Year's Profit	$30,460,000,000	-$237,000,000	-$1,294,100,000,000
			including Social Security
Total Long & Short-term Debt	$15,014,000,000	$12,306,000,000	$9,017,800,000,000
			Held by public only
Debt to Revenue Ratio	4%	174%	417%
Debt to profit Ratio	49%	-5192%	-697%
Source	Yahoo Finance	Yahoo Finance	CBO
Fiscal Year	12/31/2010	12/31/2010	9/30/2010

Now tell me who is junk now!  The US Government is clearly way over indebted.  I only used publicly held debt and not the debt held by the “Social Security Trust Fund”.  I also used the deficit numbers after Social Security and US Post Office receipts.

If you look at the $9T in debt versus a GDP of $14T the debt to “Income” ratio is a mild 64%.  Not AAA standard but probably not junk.  This clearly shows that a simple distortion can make a large deal when rating a sovereign nation.

As everyone can clearly see the downgrade from S&P was clearly way overdue.  In my opinion they are being generous.  I would have rated them probably junk around B+ at best.  I think the fact that the US Government is going after S&P in a retaliatory strike is a joke.  They are trying to shoot the messenger.  I fully expect to see the US Government rated AA3 within the next 5 to 10 years once the other rating agencies grow some balls.

Full Disclosure

I do not own any treasuries but I do own approximately $250 in face value of savings bonds my kids received from grandparents and friends that I have never got around to cash yet.  Given these figures I might want to soonJ!