The US government's debt has been downgraded. Here's what to know
S E E D E D C O N T E N T
WASHINGTON -- Late Tuesday, Fitch Ratings became the second of the three major credit-rating firms to remove its coveted triple-A assessment of the United States government's credit worthiness, a move that spurred debate in Washington about spending and tax policies.
Fitch cited the federal government's rising debt burden and the political difficulties that the U.S. government has had in addressing spending and tax policies as the principal reasons for reducing its rating from AAA to AA+.
Fitch said its decision "reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance" compared with other countries with similar debt ratings.
The downgrade may have little impact on financial markets long-term or on the interest rates the U.S. government will pay. Here's what you need to know:
Fitch's move comes just weeks after the White House and Congress resolved a standoff on whether to raise the government's borrowing limit. An agreement reached in late May suspended the debt limit for two years and cut about $1.5 trillion in spending over the next decade. The agreement came after negotiations approached a cutoff date after which Treasury Secretary Janet Yellen had warned the government would default on its debt.
The Biden administration reacted angrily to the move. Yellen said Wednesday that Fitch's "flawed assessment is based on outdated data and fails to reflect improvements across a range of indicators, including those related to governance, that we've seen over the past two and a half years."
"Despite the gridlock, we have seen both parties come together to pass legislation to resolve the debt limit," Yellen said.
But Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, said that Fitch's decision was the right one, given that there are few efforts in Washington to address the government's longstanding budget deficit.
"This is about a fundamental mismatch over the long term between our spending growth and our revenue capabilities," he said.
Standard & Poor's removed its coveted triple-A rating of U.S. debt in 2011, after a similar standoff over the borrowing limit.
Fitch said that the ratio of U.S. government debt relative to the size of its economy will likely rise from nearly 113% this year to more than 118% in 2025, which it said is more than two-and-a-half times higher than is typically the case for governments with triple-A and even double-A ratings.
WHAT TYPICALLY HAPPENS WHEN DEBT IS DOWNGRADED?
Ratings agencies like Fitch and its counterparts, Standard & Poor's and Moody's Investors Service, rate all kinds of corporate and government debt, ranging from local government bonds to debt issued by huge banks.
In general, when an issuer of debt has its credit rating downgraded, that often means it has to pay a higher interest rate to compensate for the potentially higher risk of default it poses.
WHAT COULD THAT MEAN FOR U.S. TAXPAYERS?
Many pension funds and other investment vehicles are required to only hold investments with high credit ratings. If a city or state, for example, sees its credit rating fall too low, those investment funds would have to sell any holdings of those bonds. That would force the government issuing those bonds to pay a higher interest rate on its future bonds to attract other investors.
If that were to happen to U.S. Treasury securities, the federal government could be required to pay higher interest rates, which would push up interest costs for the government and taxpayers.
WILL U.S. BORROWING COSTS RISE?
Few economists think that such an outcome will actually occur. Instead, they think Fitch's downgrade will have little impact. Few pension funds are limited to holding just triple-A rated debt, according to Goldman Sachs, which means the current AA+ from Fitch and Standard & Poor's will be sufficient to maintain demand for Treasurys.
"We do not believe there are any meaningful holders of Treasury securities who will be forced to sell due to a downgrade," Alec Phillips, chief political economist for Goldman Sachs, wrote in a research note.
Large U.S. banks that are required by regulators to hold Treasurys won't see any changes in those rules just because of the downgrade, Phillips added in an interview, because regulators will still see them as safe investments.
For most investors, U.S. Treasury securities are essentially in a class by themselves. The U.S. government bond market is the largest in the world, which makes it easy for investors to buy and sell Treasurys as needed. The United States' large economy and historic political stability has led many investors to see Treasurys as nearly the equivalent of cash.
Rating agency downgrades typically have more impact on smaller, lesser-know debt issuers, such as municipal governments. In those cases, even large investors may not have much information about the creditworthiness of the bond and are more reliant on the ratings agencies, Phillips said.
Yet that isn't really the case for Treasury bonds and notes, he said. Large investment funds and banks form their own opinions about Treasury securities and don't rely on the ratings agencies, he said. Fitch's analysis also didn't provide much new information, he added. Other entities, such as the nonpartisan Congressional Budget Office, have made similar projections about where U.S. government debt is headed.
"Nobody's holding Treasuries because of the ratings," Phillips added.
WHAT DOES FITCH MEAN BY 'GOVERNANCE'?
Fitch cited a decline in "governance" as a key reason for its downgrade, a reference to the repeated battles in Washington over the past two decades that have led to government shutdowns or even taken the government to the brink of a debt default.
"The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management," Fitch said.
At the same time, Fitch is referring to the inability of even compromise legislation to meaningfully address the long-term drivers of federal government debt, specifically entitlement programs for the elderly such as Social Security and Medicaid.
"There has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population," Fitch said.
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"This is about a fundamental mismatch over the long term between our spending growth and our revenue capabilities," he said.
The inevitable consequence of the reckless government spending & printing of money.
Who would have thought.... you'd be agreeing with me, and I'd be voting you up.
There may be hope for this country.
You should not be surprised by me holding a fiscally conservative position.
This is what I oft reference when I suggest that people should NOT operate on stereotypes and assume partisanship. To wit, just because I disagree with you on issues such as Trump, Fauci, China conspiracy theories, etc. does not mean that I necessarily disagree with you on other matters.
I cannot say I'm surprised.
Between our soaring debt, inflation and this downgrading, servicing our colossal debt will get evermore expensive.
Remember, thank your local Democrat.
see @4
See @3
Per Jeremy @3 :
Partisan blindness ⇡ :
The national debt has been a bipartisan failure going back several decades. It is not strictly the failure of Ds. Blind partisanship distorts one's ability to comprehend reality.
R
Yes and recent analysis by the CBO finds:
Here is another chart showing Government Debt up to more recently. The uptick it recent months is starting to look like the rate of increase after the pandemic.
This iframe is not allowed
source: tradingeconomics.com
The spending related to the pandemic that began during Trump's administration certainly made a huge difference in the rate of increase. It also illustrates that once that rate of increase starts, it rarely goes away. That appears to be the issue with spending and tax increases, once they start, they rarely come back down to a level lower than when they started. Politicians on both sides of the aisle are responsible for this, although I agree that it is silly to heap the blame (or credit if the debt rate slows) on just a President.
HERE is an interesting analysis of the historical deficits, presidents and congress for what its worth. Another HERE about the accumulated debt and how we got here.
Here is the chart that would not load.
Definitely a a both party problem, but hardly equal --
FY 2021 End of Trump, deficit $1.5T
FY 2017 End of Obama, deficit $666B
FY 2009 End of Bush II, deficit $1.9T
FY 2001 End of Clinton, deficit $133B
FY 1993 End of Bush I, deficit $347B
FY 1989 End of Reagan, deficit $255B
FY 1981 End of Carter, deficit $90B
There are several ways to interpret the data, and again, just looking at the president rather than also the Congress and more importantly the global or economic events at the time is folly.
I linked to this article above and it is worth a read
Which party had power when the federal debt rose the most?
Their conclusion?
Agreed.
I was speaking of the national debt. You are speaking of the budget deficit. Both are problems of both parties, but to me the national debt is of much greater concern. And, certainly, the parties have not been in lockstep. Also, we should tie both more to Congress and not as much to the PotUS.
I believe the president has had a lot of power starting with Reagan because the house & senate have been divided such that a presidential veto cannot be overridden by one party. This is important because costly legislation, e.g. a massive tax cut that primarily benefits the already rich, can be stopped by veto. That's why cuts like these always happen under Republican presidents. The same thing goes for the costly wars and war mongering.
Debt is the wrong stat to look at. The deficit causing the rise in debt is what you should be looking at. Assigning increases in debt to a particular congress/senate/presidency is nonsensical because it's not possible for a change in the house/senate/presidency to have a quick effect on the deficit. You are assigning responsibility for a debt caused by a deficit which the new occupant(s) inherited. Policy changes are required and they take time to have effect. You should look at what happens over at least a 4 year period. That and the veto power of presidents is why I look at the deficit over presidencies.
For Reagan through Trump, even excluding the Pandemic, we go into Republican presidencies with deficit x and pop out the other end with a deficit of 2x, 3x, 4x+. The opposite is true for Democratic presidencies. The marginal tax rate on the rich goes down under Republican presidencies and up under Democratic. Republicans don't fare well with unemployment either. I'm financially conservative and Republican financial policies are irresponsible. Look the GWB presidency: two tax cuts, two wars, a new Medicare drug benefit, but no new taxes or spending cuts to pay for anything. Even if you exclude the wars from the deficit, which GWB did, it's still a bad number (which isn't the deficit).
If a tax cut pays for itself, then the deficit should not increase. If the economy is growing, then the deficit should not increase. I stand by this method of judging financial responsibility.
What always has amazed me is the President getting credit or blame for the deficit, the president can only spend what congress gives him. Blaming Obama or Trump is inaccurate, sure they have to sign the budget, that's if they ever actually got one. The true people responsible for our downgrade are our representatives.
Indeed. Also, the effect on an economy is often delayed. Thus legislation / actions that might affect the economy are more likely to do so in the next term (and this might be a different PotUS).
Bidenomics at work.
What makes this even more laughable is the idiots in the WH are actually trying to place blame of this on Trump.