Moody's Investors Service has downgraded the credit rating outlook of the United States from 'stable' to 'negative', putting its perfect credit rating at risk. The agency expects that the US' fiscal deficits will remain very large, significantly weakening debt affordability. If political institutions in the country do not become more stable, the AAA bond rating of the US could drop, resulting in increased costs for future debt. The US currently has a debt of over $33 billion, nearly double what it was a decade ago. Moody's projects that the debt-to-GDP ratio will reach 170% by 2042. Despite this warning, Moody's acknowledges the resilience of the US economy and the stabilizing effect of the US dollar in global trade. However, investors are advised to monitor changes in interest rates and the government's progress in reaching a long-term spending agreement. Panic-selling or drastic changes in stock portfolios are not recommended at this time. The warning comes as the US has accumulated over $1 trillion in credit card debt and depleted trillions of dollars in savings. Runaway federal spending, including on 'green' energy programs, has led to multi-trillion-dollar deficits and inflation. The typical American family has lost almost $5,400 in annual purchasing power under the Biden administration. Gross interest on US debt in October was $89 billion, equivalent to 40% of all income taxes collected. Investors are becoming concerned about the government's ability to pay its bills.
House Budget Committee Chairman Jodey Arrington (R-TX) expressed concern over the recent downgrades in the US credit rating, the worsening fiscal outlook, and the softening of the US Treasury bond market. The statement comes amidst heightened interest rates and out-of-control spending levels.
Moody's downgrade reflects the end of near-zero interest rates and the rising cost of deficit spending. The interest payments on U.S. debt are projected to reach 26% of federal revenues by 2033. Some observers believe this announcement could mark a turning point for the country's debt and deficit concerns. Deficit watchdogs are renewing calls for a bipartisan fiscal commission to develop a plan to stabilize the debt-to-GDP ratio and address federal programs. A previous commission in 2010 was unable to achieve consensus, but proponents believe a new commission has a good chance of success.
Moody's warns that interest payments on the national debt will consume over a quarter of federal tax revenue by 2033. The recent uptick in yields on U.S. Treasury bonds suggests that investors are pricing in more risk. The trajectory of federal budget deficits and the national debt may be causing investors to hedge their bets for a possible federal default. Moody's announcement signals a potential future downgrade of the federal government's credit rating. The article criticizes Federal Reserve Chair Janet Yellen's view that bond yields do not reflect increasing concern about the fiscal state of the government. The author suggests that federal officials are ignoring the fiscal reality and engaging in politically motivated gaslighting.
Moody's has put the U.S. government on a negative credit outlook, indicating potential downgrades in the future. The report highlights increased downside risks to the U.S.'s fiscal strength and the erosion of its unique credit strengths. The warning implies that the U.S. government is no longer a risk-free borrower, and the Treasury will have to add an interest rate premium when selling new debt. Moody's also emphasizes the connection between the U.S. dollar's reserve currency status and the country's fiscal strength, stating that as the reserve currency status erodes, fiscal strength weakens. The report suggests that the U.S. government is gradually losing its fiscal sovereignty and warns of a potential fiscal crisis in 2024. Congress is urged to create a debt commission to avoid the crisis. The article discusses two scenarios: one where Congress acts and interest rates remain stable, and another where Congress fails to act and the Federal Reserve raises rates, leading to higher interest rates and a new episode in American politics and the economy.
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References:
- The European Conservative: https://europeanconservative.com/articles/analysis/moodys-opens-path-to-u-s-fiscal-crisis/
- Reason.com: https://reason.com/2023/11/14/after-moodys-warning-federal-officials-continue-to-ignore-fiscal-reality/