Will Obama’s administration be overwhelmed by debt?

Moody’s, the credit rating agency, is starting to ask a very scary question, albeit in very soothing language. It has just issued it’s clients with a report called Dimensioning US Government Debt.

By taking over Fannie Mae and Freddie Mac and by expanding the activities of the Federal Reserve the US government has taken ownership of trillions of dollars of mortgage, credit card and business loan debts that the private sector will no longer fund. At the same time, with President Barack Obama’s $800bn-$900bn stimulus plan, it is borrowing even more so that it can bankroll the economic activity that the private sector no longer will. US government debt held by outside creditors is projected to grow by more than half in the next two years.

I’m not arguing that it shouldn’t be done. Far from it. The alternative is a sudden collapse in living standards and all the horrors that The Independent’s Business and City editor Jeremy Warner set out this morning. Paying down that debt over time will crimp economic growth, too, but spreading the pain is best.

Still, as we’re all very aware now, debt is risky, and sky-high debt is very risky indeed.

Moody’s is beginning a discussion about whether the US government’s gold-plated Aaa credit rating is sustainable. The agency doesn’t say it isn’t, and it repeatedly offers comfort in that other once-rock solid Western governments are also seeing a deterioration in their credit quality. But it has some stark truths to tell. For example:

If the recession fails to abate, government revenue could fall short, and those ratios could deteriorate alarmingly. And as Moody’s also points out:

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