Economic Turmoil: US loses AAA Rating

US Economy

Despite the (so-called) ‘resolution’ of the debt ceiling crisis a 8 weeks ago, the Whitehouse responded ‘angrily’ to Fitch downgrading the US Government’s AAA credit rating.

For the first time in modern history, the creditworthiness of the United States has been called into question. This represents a humiliating blow to the world’s largest economy, and could have profound impacts on the finances of the nation for many years to come.

Details of the downgrade

Fitch Ratings Agency

Fitch was the first of the major credit agencies to downgrade US debt from AAA to AA+, adjusting their outlook from ‘stable’ to ‘negative’. With over $22 trillion in debt currently owed, the lower rating signals that the US may have difficulty meeting its financial obligations going forward.

Fitch cited the ongoing political brinksmanship in Washington and inability to get soaring debt under control as its reasons for the downgrade. The recently-passed debt deal was viewed as inadequate by Fitch analysts, according to reports.

In their report, they noted “political maneuvering and less-than-credible policy frameworks have increased the risk that the government might default on its debt obligations.”

White House insults Fitch rather than address the serious implications.

But the White House rejected this assessment. In a sharply-worded statement, Biden administration officials called the downgrade “amateurish” and “not consistent with the economic data.” Their statement accused Fitch of making “a blunder…based on politics, not economics” and suggested other rating agencies would uphold America’s sterling AAA grade.

Isn’t it funny how the Biden administration can just re-define terms whenever it likes?! So Fitch, who for years has been respected and adhered to, is suddenly ‘wrong’, and to make it worse, blamed for being ‘political’, when the truth is quite the opposite. Pots and kettles.

Fitch made an honest assessment, as it has done for decades. Biden’s political image suffers due to that honest assessment and as such, instead of saying “we screwed up”, he instead claims Fitch is being political! If it weren’t so serious, it would be hilarious. Disingenuous, but hilarious all the same!

Other ratings agencies back up Fitch’s assessment.

Standard & Poor's Rating Agency

Unfortunately for the White House spin doctors, Standard & Poor’s and Moody’s followed suit within hours and issued their own downgrades of US debt to AA+ status.

The major rating bureaus are now unanimous in their assessment that US creditworthiness should be demoted.

What does this historic downgrade actually imply though? And, more importantly, how could it impact average Americans, you know, the ones who provide the money for governments to make such monstrous balls-ups?

Implications for everyday citizens.

Citizen counting pennies

This event signals that the US government’s ability to repay its enormous debts is no longer ironclad. Lost trust in creditworthiness always makes borrowing more expensive. To attract investors, the US Treasury will now be forced to offer higher interest rates on bonds. [As shown here].

People with credit cards and variable-rate loans may see their interest costs rise as a result. Lenders themselves will also pay more to access capital from the bond market, which could crimp lending and tighten access to mortgages or car loans. Overall borrowing costs throughout the economy will likely increase.

Reserve currency implications

Similarly, this ratings demotion also chips away at the Dollar’s crucial role as a global reserve currency. The importance of this point can’t be overstated.

There is now more reason for central banks and institutional investors to diversify away from Dollar holdings into currencies like the Euro or Yen to reduce risk. This could well undermine the Dollar’s value and contribute to higher inflation for American consumers.

The blow to national prestige is equally concerning. The assumption that US Treasury bonds are the ultimate safe-haven asset has been shattered.

For a country accustomed to borrowing freely and cheaply, this is a rude awakening. Financing future deficits will become more difficult and costly. Down the road, this could necessitate painful tax hikes or spending cuts to social programs that everyday Americans rely on.

So much for the recession being ‘transitory’.

America’s already fragile economic recovery faces a new headwind as well. If business and consumer confidence are undermined by US debt burdens, growth is likely to suffer. Investors may pull back on hiring and spending plans given the uncertain fiscal outlook. More turmoil in financial markets could hamper investment and retirement accounts.

The historic loss of America’s AAA crown signifies that the country cannot continue with unsustainable levels of debt. Politicians can no longer make promises that our track record of fiscal responsibility cannot support.

To avoid further damage, tax-payers and our so-called ‘leaders’ must have an honest reckoning with what we can and cannot afford as a nation. There are no easy solutions, there are only tough choices ahead. And it takes a tough leader to take tough decisions.

One Dollar

What now for the US economy?

While the White House reflexively rejected the downgrade news, wiser folks should heed the urgent message, the writing on the wall, so to speak.

Ratings agencies have shone a harsh spotlight on our debt addiction. Significant financial and economic pain may follow unless we take corrective action. That means NOW.

This is undoubtedly a humbling moment for a superpower to face. But it is only by confronting hard truths that renewal becomes possible. And boy do we need some of that.

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