Last week Fitch, one of the three major private credit-rating agencies, downgraded the US economy credit rating from AAA to AA. The main reasons for this:
- There is a major issue with US government spending and debt. Currently the US is now borrowing to pay its debt on interest on money it’s already borrowed (Ponzi scheme).
- Politically neither the Democrats nor the Republicans seem to have much interest in the country’s long-term fiscal trajectory. They walked away from debt-ceiling negotiations without doing much of anything
- Despite strong growth, the US government is running as large a deficit as it was during the worst of the Great Recession. And the debt now stands at $32 trillion.
- The US borrowing costs are up 35% a year as central banks hike interest rates to tackle inflation. The average interest rate on US government debt has risen from 1.6% as of 2021 to 2.1% today.
- Fitch is saying that the US government is not able to raise taxes or contain spending in a way that makes people confident that they can pay off its debt in the long-run.
What impact will this have?
The debt would increase the country’s borrowing costs, thus reducing investment relative to consumption. Larry Summers, the former Treasury secretary, stated that there maybe insufficient investment for venture capital, inadequately trained armed forces and maintain leadership in AI and biomedicine. There is also the risk of stagflation and of investors dumping American assets. The major concern is the government’s inability to do anything effective whilst the Republicans keep taking the debt ceiling hostage while running up huge deficits themselves. Below is a report from Al Jazeera which discusses the downgrade.
Who are the credit rating agencies?
There are three main rating agencies in the global economy – Standard & Poor’s, Moody’s and Fitch and they control more than 94% of outstanding credit ratings. They are basically an oligopoly influencing financial portfolio investments, the pricing of debt and the cost of capital. Their authority is also enhanced by the SEC (Security and Exchange Commission) who see them as the official CRA. See below for ratings.
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