Boston University economist Laurence Kotlikoff provides a scary diagnosis of the fiscal health of the US:
http://www.bloomberg.com/news/print/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html
While much of the current debate revolves around the viability of a second round of stimulus, it may be worth considering the advantages of tackling the longer-term challenges posed by entitlement spending. Restoring confidence regarding the long-term fiscal health of the US can provide tremendous relief to financial markets (and businesses as well).
The current 'flight to safety' aspect that is pushing US treasury yields lower is not likely to last forever. In fact, one wonders about the sanity of financial market participants when JGB (Japanese Government Bonds) and US treasury bonds are considered the safest assets. Japan's government debt to GDP ratio is already around 200%. It faces serious demographic challenges (see previous post). The US, meanwhile, has to deal with serious political and structural challenges that inhibit the ability of the government to reign in entitlement spending (all 78 million or so baby boomers will be eligible for social security and medicare in little more than a decade). Potential growth rates for both Japan and the US are likely to be lower in the near to medium term as well.
What is likely to happen as continuing financial deepening (especially the further development of bond markets) in emerging markets creates real alternatives for global bond investors?
Currently, all three major rating agencies (Moody's, S&P, and Fitch) are based in the West (US & Europe). The performance of the major rating agencies during the past decade has been woeful at best. They certainly bear some culpability for the recent financial crisis. China is promoting a new challenger - Dagong International Credit Rating Company. It's views on sovereign debt ratings are quite different from that of Moody's, S&P, and Fitch.
http://www.eastasiaforum.org/2010/07/18/china-scores-an-a-says-beijings-credit-rating-agency/print/