Fitch Downgrades the US Rating to 'AA+'
fitchratings.com
fitchratings.com
The core issue is the size of the debt. The US is constantly paying off old debt with new debt. Except this year the cost of those funds quadrupled -- which means, even more debt.
If interest rates stay high for several years, our national debt will balloon out of control. At a point we'll have no money left for anything but interest on the debt, or we'll just print so much money to pay interest on our national debt inflation will come back with a vengeance.
At some point I'd love to see a grand bargain where we 1) raise taxes a bit and 2) lower spending a bit. I'm not holding my breath...
Like any business, government debt is fine as long as it’s used to fund expenses that have an roi greater than the debt servicing costs. Otherwise there will be a default (tho for government inflation is also an option)
Most federal spending is on things that will have no monetary return. A very large proportion is on age-related spending (healthcare and social security).
Running up debt to pay for education makes a certain amount of sense. Running up debt to pay for the lifestyles of those who will never have to service that debt seems unjust.
A lot of country's debts can be attributed to people getting old and needing to save for retirement, things will get bloody when those countries go off the demographic cliff (e.g. Japan, western Europe, China eventually, and of course the USA).
What happens when we hit 10 births per 1000 people?
South Korea has it even worse:
https://www.macrotrends.net/countries/KOR/south-korea/birth-...
They are bottoming at 6.
You never know what happens until it does. Hopefully productivity increases along with redistribution away from just the capital that provides those increases will help, or perhaps we will get in a big war or pandemic and the problem will sort itself through excess deaths.
Money can be invested in assets other than savings accounts, e.g. the share market. Government borrowing pushes up interest rates attracting saving that might otherwise go into investments that generate returns.
Government spending using debt isn’t like saving for retirement, it’s borrowing for retirement and leaving the debt to your kids.
Yes, that's why we have stock market bubbles and housing bubbles. Our 401Ks are heavily invested in index funds, while the rest of our savings are usually invested heavily in real estate (which is one reason why our housing prices are rising so quickly!). Now imagine leaning in on those 10 times more heavily than we do today...
> it’s borrowing for retirement and leaving the debt to your kids.
The point is that there is a massive demand for savings now, that money would have to be lent out to someone no matter what, and dollars are safe because US treasuries can soak up billions instantly with some sort of interest rate that will be paid back. You can't just say "oh, we should stop borrowing that money" unless you have a better idea of where to it can go.
Individual humans retire. Corporations and governments don't. The latter can roll over debt indefinitely. There is never any reason to pay it off.
The only limit is whether they can afford the interest, which is a function of how well they apply the spending to ensure income. It's very different from a household budget and comparisons easily mislead.
Sure you can. The UK has been doing it for four hundred years: they have in several instances been over 150% debt-to-GDP, and twice went over 200%:
* https://en.wikipedia.org/wiki/United_Kingdom_national_debt#H...
Given the UK has never (AFAICT) had a surplus, that means they've simply continued to roll over debt, dating back to the South Sea Bubble (1700s), Napoleonic Wars (early 1800s), Crimean War (late 1800s), WW1 (1900s), etc:
* https://www.theguardian.com/business/blog/2014/oct/31/paying...
(There current woes are of dumb decisions unrelated to fiscal issues, though the decisions are not helping the economy.)
See also Japan, who no one is freaking out about:
> As of March 2023, the Japanese public debt is estimated to be approximately 9.2 trillion US Dollars (1.30 quadrillion yen), or 263% of GDP,[1] and is the highest of any developed nation.[2][3][4][5] 43.3% of this debt is held by the Bank of Japan.[6]
* https://en.wikipedia.org/wiki/National_debt_of_Japan
* https://asia.nikkei.com/Spotlight/Asia-Insight/Japan-s-growi...
Wait, I don't believe that at all, for the following reasons:
1. The opposite hasn't been true. We have seen two dramatic tax cuts in recent history which absolutely did not lead to reduced spending.
2. The majority of federal spending is for healthcare or social security. Spending in these areas is somewhat hard to change, even with the political will. It's certainly damn near impossible to decrease such spending; it would immediately cause massive hardship for the most vulnerable people in our society (and probably riots riots).
3. The U.S. has run a surplus before and somehow didn't immediately bet it all on the ponies.
Perhaps our modern politics are so dysfunctional that there is no way out.
Even at a "personal debt" level, the main way out of debt is to make more money. Always has been. "Saving your way" out is a pipe dream that mostly doesn't happen. Especially as people have been coerced into paying so many private companies for things.
They collectively want to save their cake for later and eat it now, and somehow it's always someone else's fault that there's just one cake.
Anyway, this leaves the executive branch with nothing by bad options. Here are the ones I can think of, from least-bad to worst:
1. Ignore the debt-ceiling because it is weird self-contradictory nonsense compared to business as usual, fight it in federal court system as Congress Being Impossibly Stupid. (I prefer this one.)
2. Proactively ignore some spending laws while enforcing others of the President's choice. (Unconstitutional, President can't line-item-veto.)
3. Specifically ignore laws around Federal Reserve and its nominal independence, so that the President can arbitrarily print more money for everything. (Similarly unconstitutional as #2, will severely spook markets and leads to a slippery-slope of inflation since it's no permanent fix.)
4. Raise new taxes of its own choosing. (Explicitly unconstitutional, only Congress can do that.)
5. Cease to honor its debts. (Explicitly unconstitutional, also major financial/economic/diplomatic crisis.)
But we'll have piles of currency and we'll be lacking in actual things to buy with that. It acts as a regressive, stealthy tax so it's always politically favorable even if it's bad for us economically.
And it has downstream effects because of the demand for inflation-proof goods that are easy to get cash for (gold, silver, property you can rent out), which has other effects like making housing an investment and it being hard for people who actually want to live in those, etc.
Then you game the inflation metrics to make things look good and people wonder why numbers keep going up and they can't make any progress on actually improving their lives because they have no idea what they're really being taxed.
They'll keep getting away with it as long as people see numbers going up and never realizing the source of the problems.
I have never once heard during the budget negotiation process, "we cannot increase this budget because it will put us over the debt limit."
The debt limit restricts the US from paying for things it has already purchased. It in no way stops the US from purchasing them, or budgeting for them, in the first place.
Using the debt limit as a means of controlling future budget negotiations (in other words, "adopt my budget priorities or I will tank the economy") is exactly why Fitch downgraded US debt, thereby increasing the cost of debt service and exacerbating the problem you're concerned about.
In 2023 the negotiations on the debt limit cut $1.5T in projected debt over the next 10 years. Both parties were unhappy but agreed to the cuts.
Btw, $1.5T is not nearly enough. In 2033 we'll "only" be $46.7T in debt instead of $45.2T, which is basically not enough to move the needle.
>McConnell said that Republicans would not block a short-term increase of the debt limit until December, as long as Democrats met certain conditions.
It would be nice if both parties were unhappy! However it's very clear which party owns power when it comes to the debt ceiling here, and the other bearing the potential burden of causing financial ruin.
The grand bargain you speak of has already occurred. It occurs when Congress passes a budget that is signed by the President.
https://www.pgpf.org/blog/2023/05/the-federal-government-has...
Reminder: inflation hurts the poor the worst, as their wages tend to lag behind price increases.
This is wrong. This is a misunderstanding of what the debt ceiling is.
Congress has the power of the purse and can pass what ever budget they want.
They can say tomorrow that they will spend $1,000,000,000,000 a year on what every they want and the debt ceiling can't do anything about it.
The Debt ceiling is only about existing spending. Which has already been authorized. And ironically, almost always by the party no longer in power who is trying to block the debt ceiling from being raised to pay for the spending they authorized when they were in power.
It does nothing to stop congress from authorizing new spending after the fact.
Congress can chose to lower spending when they are in office. The fact that neither party has done that in over 30 years indicates that neither party cares about the national debt until the other party is in power.
And? Why is this a problem?
Given the UK has never (AFAICT) had a surplus, that means they've simply continue to roll over debt, dating back to the South Sea Bubble (1700s), Napoleonic Wars (early 1800s), Crimean War (late 1800s), and WW1 (1900s):
* https://www.theguardian.com/business/blog/2014/oct/31/paying...
The UK has been doing it for four hundred years: they have in several instances been over 150% debt-to-GDP, and twice went over 200%:
* https://en.wikipedia.org/wiki/United_Kingdom_national_debt#H...
(Their current woes are of dumb decisions unrelated to fiscal issues, though the decisions are not helping the economy.)
> If interest rates stay high for several years […]
You mean like they did in the 1980s?
* https://www.macrotrends.net/2016/10-year-treasury-bond-rate-...
* https://fred.stlouisfed.org/series/FEDFUNDS
* https://ritholtz.com/2016/10/long-history-long-10-year-us-tr...
Over the long-term (centuries), the general trend of interest rates is downward (with sporadic spikes, which often correspond to wars):
* https://www.visualcapitalist.com/700-year-decline-of-interes...
* https://www.bankofengland.co.uk/working-paper/2020/eight-cen...
For most of the 2010s people were complaining about inflation being too low (along with interest rates).
We’re not (in my option) going back to zero interest rates, so interest will make balanced budgets impossible to achieve.
Also don’t see much appetite to cut defense as we’re aligning to have China and Russia as enemies.
Rather I think we’ll resort to more of the Fed buying up the debt who can remit the interest payments back to the treasury.
I could see a scenario where they even just retire/redeem treasuries so the debt just goes away. The downside it’s inflationary but also does this erode confidence in the system where things are (even more so) centrally controlled.
The only thing in view that has the slightest hope of stabilizing matters is an Article V convention, as far as I can tell.
>Ratings Downgrade: The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.
https://fred.stlouisfed.org/series/A091RC1Q027SBEA
Or, well, a lot of just general statistics around the debt once you consider what they literally mean.
The chart you actually want to make your point is this one: https://www.crfb.org/sites/default/files/Screen%20Shot%20202...
Which is still not great, but it isn’t an arbitrary exponential with no context.
From a game theoretic perspective, waiting until the last moment is the most optimal.
Therefore, it will continue to happen until the voters find it so unpopular they begin voting out politicians that behave like this.
I wish politicians weren't so short-sided.
https://www.axios.com/2023/05/23/democrats-debt-ceiling-regr...
https://www.washingtonpost.com/opinions/2023/02/07/joe-manch...
But then, that's because moderate/conservative democrats have decided it's to scary to eliminate the debt ceiling (there's not enough votes for that). So maybe still a conservative problem but not entirely a republican problem.
We are right to consider why we are a primarily export-based economy with a dollar tied so tenuously to oil. Blaming Republicans, when in fact it's a problem of crony-capitalism, is somewhat shortsighted. Some of the richest, filthiest, congresspeople are Democrats. To assert it's one-sided is very sound-bite politics of you. I would go to open secrets and see just how equal congresspeople are in exploiting the national debt for political and financial gain.
This line of reasoning makes no sense... Holding the debt ceiling hostage is just posturing, and from your comment and some others it really seems to work even in seemingly intelligent people, imagine with the rest of the voters?
The incentive is showing up here. Lose a little rating, it's harder to rotate national debt, and suddenly the ~10% of the budget used to service the debt balloons to 50% as borrowing rates increase. This would be a catastrophe.
That is the "game" being played.
The reason the public isn't outraged is because they don't understand these connections
> the economic health of the entire country and likely the rest of the world
Our political system in the US is set up in such a way that those who acquire political power are going to spend as much time and effort as possible keeping it or acquiring more power. Any improvement that comes is secondary compared to getting re-elected
The more specific problem is that the incentives aren’t aligned, because voters aren’t capable of seeing the relevant causes and effects. When the only thing voters react to is immediate economic conditions, of course politicians fight tooth and nail for more spending when they are in power and cuts when they are not.
But there are actually people deluded enough to say Biden was responsible for the most recent hostage-taking, so hell if know what's going on. Maybe the GOP could actually blow up the US economy without consequences.
And they're not wrong
> Ratings Downgrade: The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.
I believe what the other comments mentioning "at the very top" mean is that it's there on the by-line, not buried somewhere else in the report. To me it makes sense to call it "at the very top".
(I’d argue that “both sides” thinking is usually lacking in objectivity, but this seems unarguable.)
I see no evidence that either party wants to restrain spending when in power, but pretending this is a partisan issue and that one party is at fault for questioning spending as apparently some are doing is reality distortion to a new extreme.
Well yea of course they are. You act like that's some kind of terrible thing to do, lol.
If the GOP has an issue with "printing unlimited money", perhaps they should have cut spending when they had full control of Congress and the White House, rather than implementing cut taxes and boost spending:
* https://en.wikipedia.org/wiki/Tax_Cuts_and_Jobs_Act
The GOP only has an issue with "printing unlimited money" when there is a Democrat in the White House.
The Republicans were also quite adamant on spending control during the Clinton (Democrat) years:
* https://en.wikipedia.org/wiki/1995–1996_United_States_federa...
But much less so under the Bush (Republican) years:
* https://en.wikipedia.org/wiki/Bush_tax_cuts
Reminder: it was under a Democratic president (Clinton) that the US had a budget surplus:
* https://www.brookings.edu/articles/a-surplus-if-we-can-keep-...
* https://en.wikipedia.org/wiki/Economic_policy_of_the_Bill_Cl...
And it was lost under a Republican president.
So yes: it is one particular party that is more of the issue.
The debt limit adjustment is to allow the treasury to borrow enough to cover payments already approved by congress. It is meretricious to object to that: if you don't think the money should be spent you should not have approved the spending in the first place.
Which of course is bull shit. But here we are.
I can't help but quote this again: «The U.S. has a comparative advantage as a safe financial haven. We have the world’s strongest military and a stable government. Thus, we have a comparative advantage in producing debt, primarily government debt. That is not necessarily a good comparative advantage to have.» (Arnold Kling)
If there was time to downgrade US debt it would likely be the time when the US rapidly moved and even outsourced its production to China, shutting down local factories. That was the time when the risk for the US might was increasing, should the US-China relations sour (as they have). But of course downgrading wasn't happening then; I suspect it was the other way around.
The previous administration attempted a coup to retain power....
also said guy was just charged. so, maybe there's some hope for that stability.
> ESG: ... These scores reflect the high weight that ESG has in Fitch's proprietary Sovereign Rating Model. ... https://www.fitchratings.com/topics/esg
If what you'd like to say is that you think credit risk and ESG aren't related, well, Fitch disagrees.
And rightfully so. Lack of ethics impact credit risk, because it means more graft. Lack of governance impacts credit risk, because it's harder to know where money even went, or to ensure it's well spent. Lack of sustainability means the concern won't exist at some point, which, well, pretty large risk if your credit happens to be long running.
Points about the military and the strong, diverse economy mean nothing to me. They’re true and the US still barely pays it’s creditors.
But the only way we know to get back to those days involves raising taxes on the rich. The people ranting and raving about the debt would never agree to raising taxes, so the deficit hawks will continue blowing up the deficit until things fall apart completely.
MMT paired with UBI. You can essentially wipe out all debt by printing as much money as you need, but compensating for inflation by covering everyone's basic living costs. It seems like one of the only plausible ways forward into post-capitalism.
open source lead the way
And by flooding the economy with cash, UBI would make the problem worse, not better. Surrounding economic variables (prices, supply, cost of labor, exchange rates, etc.) would ensure that the UBI wouldn't be enough to support people. A planned economy is not the solution either - see every time that's been tried in history.
The only solution is a long-term, consistent commitment to conservative fiscal policy -- reducing unnecessary government spending, reducing the debt, balancing the budget and working within it, etc. Anything less is inviting economic trouble.
In case you haven't noticed our current economy also does not work. We are going to have to move to a new system sooner or later. Technology and productivity have reached a point (or are near the point) of being able to provide the basic living essentials to all citizens. The longer we delay accepting that, the more pain we'll all be in for.
Define "work". The problems I know of have to do with improper or incorrect governing, not the structure of the economy. These are problems with government:
- Minimum wage has not been inflation-adjusted over the years
- Antitrust legislation has failed to be enforced. The US government of 1920 would not tolerate the conglomerates, mergers, and anti-consumer practices of companies today.
- DAs around the country (and federal prosecutors as well) are failing en mass to prosecute crime.
Why not both? I think both are big problems. Is there any time government has cut spending and it ended up making the economy worse by some measure?
Both the environment and wealth inequality have hit or are very close to hitting the breaking point. My original point about MMT was that we'll need a radically new system to fix the problem. The one we have can't be brought there through the control mechanisms that exist.