Honors Program

University Honors

Date of Award

5-2012

Thesis Professor(s)

William Trainor

Thesis Professor Department

Economics and Finance

Thesis Reader(s)

Richard Gregory, Joseph Corso

Abstract

The main topic of this paper is the financial solvency, or “the ability to pay all debts,” of the United States government (“solvency,” n.d.). The questions posed and analyzed are 1) is the American government solvent, 2) did Standard and Poor’s accurately downgrade the American debt, and 3) how does the national debt affect the solvency of the American government. To determine the solvency and effects of debt, analysis of financial information for America and nine other countries, grouped according to their credit rating is used. Solvency is determined by credit rating for this analysis; a country with a high credit rating of AAA will be considered extremely solvent, with each downgrade showing a more at risk country. The appropriate credit rating for the United States will be determined by comparing the information and noting where the United States stands in relation to the other countries for four key economic indicators. Also, analysis of standard lending rules applied to America’s financial information shows whether or not the amount of debt America holds is safe compared to what requirements are expected of individuals. Appendices show more detailed solvency analyses for the ten countries, at present and over the past thirty years.

The results of the study show that solvency could be a future problem for the American government. It has only adequate capacity to repay its debt and should not have received a AA+ rating from Standard and Poor’s. A BBB+ rating would have been more appropriate. Also, applying standard lending rules to the American debt shows that it exceeds the 40% debt-to-income standard, making the likelihood of debt repayment, or solvency, low based on standards used in the financial lending sphere.

Document Type

Honors Thesis - Open Access

Copyright

Copyright by the authors.

Included in

Finance Commons

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