August 2023
Credit downgrading for the United States: Debt issue “not being dealt with.”
The most privileged country in the world is the United States. We get away with things that nobody else does, rarely facing consequences for our mistakes or wrongdoing. The Fitch ratings agency is comparable to a father chastising an unruly child.
On August 1, 2023, Fitch reduced the US credit rating from the highest possible grade, AAA, to AA+. It is America’s once-sterling credit’s second downgrading, following a similar move by S&P Global Ratings in 2011. Deadbeats are receiving the treatment they merit from Fitch.
Members of Congress who adopted a how-dare-they mentality as well as President Biden’s deputies and allies harshly criticized Fitch’s conduct. Given that the US economy is expanding, unemployment is almost at record lows, and no other advanced country recovered as quickly from the COVID outbreak as the US, some analysts contend that a downgrade is absurd.
The reasoning behind Fitch’s downgrading is accurate. Fitch stated “the expected fiscal deterioration over the next three years” in addition to “a steady deterioration in standards of governance over the last 20 years.” The firm claimed that “repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”
Politicians from both parties have grown accustomed to manipulating the country’s economy and blatantly ignoring a debt bomb that is mushrooming. Financial markets participate in fraud. US interest rates are kept much lower than they otherwise would be because the dollar serves as the world’s reserve currency. Dollars are in high demand since there are no better options. The Federal Reserve is the most potent financial organization in the world, and it has some tremendously potent weapons for preventing financial hardship.
The biggest transgressions, according to Fitch, are continuous threats to default on US debt by forbidding any additional borrowing whenever the Treasury exceeds the federal borrowing cap.
This is only possible because Congress long ago set a ceiling on the total amount of government debt as a measure to control the federal budget. For some time, it worked. The US debt burden, however, began to skyrocket around the time of the Great Recession in 2008 as a result of fiscal stimulus, the rising cost of federal healthcare programs, baby boomer retirement, tax cuts that did not generate enough revenue to cover their costs, and other causes. Over the past 15 years, the debt ceiling has had zero impact on reducing debt levels.
There would be no more disputes over whether the Treasury may continue borrowing to support spending that Congress has previously approved if Congress repealed this now-useless law. But because it gives them a frequent opportunity to hold hostages, Republicans find the necessity to periodically raise the borrowing ceiling advantageous. Everyone is familiar with the storyline: For a few weeks, Republicans claim to be concerned about the nation’s increasing debt and threaten a default unless Congress cuts funds for the needy and a few other causes deemed unworthy.
As was the case in May when we once again reached the borrowing limit, there is usually a last-minute settlement. But why in the world would you want to have a stellar credit rating if you consistently threaten to default on your debts? If there are enough Republicans to halt normal government operations while they hold just one of the two houses of Congress, it stands to reason that they could derail the entire government if they had the White House and both houses of Congress.
Democrats are not without fault. The deficit will increase from $1.3 trillion last year to approximately $1.5 trillion this year, and Biden is flaunting how he “reduced” it. Biden’s “reduction” is based on the fact that the deficit was $3.1 trillion in 2020 due to significant COVID relief, making his deficits less in comparison to that wildly out-of-the-ordinary baseline. But Biden is skimming over the truth that the deficits will probably only become worse. He tried to solve the issue by increasing taxes on corporations and the rich, but there are not enough votes to pass it. During Biden’s first two years in office, Democrats were in power in both the House and the Senate, but they were unable to increase those taxes.
One could contend that the US credit rating ought to be considerably lower. The United States is still rated AAA by Moody’s, and even with the AA+ rating that Fitch and S&P give it, it still seems to be doing far better than other industrialized countries. For instance, while having lower debt loads than the United States, the United Kingdom and France have worse credit ratings. Japan has the highest level of debt of any advanced economy, and as was predicted, its credit rating is much lower than that of the United States. Because of its unique position, America is protected from internal sabotage.
If or when a full-fledged debt crisis arises, the United States still has plenty of capacity to react. The ability of the government to tax is essentially limitless, and if necessary, it also has the ability to reduce spending. If there is already a financial crisis that necessitates such drastic action, those actions may easily trigger one, possibly a deep one. However, Uncle Sam would be forced to interfere if the only option was genuine nonpayment of US debt, which would have disastrous consequences.
Almost all evaluations of America’s growing debt load make clear that weak policymaking and the politicization of debt are the fundamental issues, not the country’s finances. A responsible steward of America’s finances would be worried by Fitch’s objective analysis rather than reacting with fury and contempt.
Everyone seems to be aware of the issue except for those who are its root cause.
