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Fred Dunkley

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Fred Dunkley is a tech analyst, writer, and seasoned investor. Fred has years of experience covering global markets and geopolitics. 

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

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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 million 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. Related: Erdogan Turns His Back On The IMF As Lira Crisis Worsens

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”.

(Click to enlarge)

The biggest threat then to the U.S. credit rating is inequality that Moody’s fears will further polarize the country.

By Fred Dunkley for Safehaven.com

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  • Freed Guess on October 12 2018 said:
    I came up with the Law of Capitalist Economic Equality while reverse engineering the cocaine trade. As the name implies, it has broad application. I´m on facebook!

    The Law of Capitalist Economic Equality is based on the presumption that people tend to negotiate to deadlocks. Deadlocked negotiations are not a bad thing that the government should step in and resolve, they are a wonderful thing that the government should encourage. People tend to negotiate in multiples of 2 and 7. Why?

    If you split gross [not net] profits 50/50 with two subordinates, you maintain a deadlock at the break-even point. You make money with three subordinates splitting profits. With twelve subordinates you have three subordinates [say foreman or lieutenants] each with three subordinates themselves. Half way between three and eleven is seven. With seven subordinates there can be only one pretender to the leadership crown with three subordinates themselves. A choice emerges in a competition for the leadership role.

    Conflict is always resolved at the break even or deadlock point where people split the difference 50/50. A 50/50 split with three subordinates implies a 25% Gini Index. An infinite number of Jeff Bezos - Amazon - monopoly - dictatorship - subordinates implies a 50% Gini index. A 37.5% Gini Index implies Capitalist Economic Equality. That is the optimum, and the world-wide average for a reason.
    Eyeball the facts and it becomes obvious that societies fall of the cliff outside the parameters into left wing dictatorships less than a 25% Gini Index, and right wing dictatorships more than 50% Gini Index. Wealth and social progress increases fastest the closer to the optimum 37.5% Gini Index. Under Capitalist Economic Equality, the government can show amazing deference to the wealthy and get away with it if the government charges and actually collects 50% taxes from the wealthy. That is the situation we are in now.

    Leaving a void in leadership with the immediate imposition of taxes higher than 50% on the wealthy is not the best idea. Anything less than 50% allows the wealthy to buy more wealth through the political process, which is a very bad thing. That´s the answer! Force the wealthy to split the take with the voters, or they won´t be wealthy very much longer.

    That is the solution for the short term fake capitalism problem we have right now. But it is never any one thing. Assume true capitalist ideals with a perfect IRS collecting taxes, nobody going to jail because they pay their fair share, flat tax rates, flat benefit and subsidy rates proportional to taxes, DREAM ON FELLA!!! NEVER GONNA HAPPEN. Still, there are no empirical exceptions to the Law of Capitalist Economic Equality. Try to find one?

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