Moody’s Acknowledges US Debt Concerns
Moody’s has been among the longest-term holders, but they’re now conceding what other financial ratings have suggested for some time: the US government is not adequately addressing its growing debt.
It all began back in 2011 when Standard & Poor’s issued a warning. This was following a moment when the government borrowed over a trillion dollars to bail out banks amid financial turmoil—an essential but arguably damaging move.
These downgrades have led to a focus on long-term spending rather than immediate economic stimulus or relief efforts. It’s kind of alarming, really; it wasn’t as much a crisis as it was a mismanagement of funds.
The S&P downgrade hit hard during the Obama administration. They were accused of politicizing the situation after publicly damaging the company’s reputation and pressuring S&P not to modify their assessment. Republicans lashed out, suggesting the Obama team might have exerted undue influence to avoid negative scrutiny.
However, both parties seemed responsible as the newly-elected Republican majority was reluctant to embrace a comprehensive deal on taxes and spending. This stalemate has really pushed both sides to operate under limited spending constraints amidst ongoing government shutdowns.
Despite hopes for future agreements—none of which ever materialized—these issues have kept major ratings firms uneasy for quite a while. They clearly saw what happened to S&P under the Obama administration and didn’t want to deal with the fallout. Not to mention, the financial landscape in America turned into a surreal scenario shortly after the downgrade, making it harder for people to grasp the seriousness of the situation. Yet, some experts continue to claim it’s not as dire as it seems.
These were times when ideas like $1 trillion coins and unconventional financial strategies were all the rage.
Given that the U.S. holds the position of the world’s largest economy and top military power, government credibility seemed less critical. The main downside of constantly running a large deficit was potential inflation, but the Federal Reserve appeared capable of managing that. It’s not like we need to start raising interest rates like we did back in 1981, right?
This magical thinking returned in 2017 when Republicans took control in Washington, promising tax cuts and increased spending. Even with faster growth anticipated, they still ended up with a nearly trillion-dollar deficit. Tax revenues didn’t keep pace with the bipartisan fiscal dreams that many believed would come to fruition.
When the pandemic hit in 2020, suggested responses ranged widely, but none seemed to stave off another credit downgrade.
Fitch, much like S&P, didn’t jump in until 2023. This situation mirrored the 2011 S&P experience, lacking a significant bipartisan pandemic relief effort. After the dust settled, the government continued to seek ways to extend spending, resulting in even longer-term debt. Inflation was certainly a concern for consumers, but the deficit kept chugging along.
They called it a “better return,” or BBB, but it cost the federal government its second AAA rating.
Now we find ourselves in a situation where Moody’s believes the US doesn’t deserve an excellent credit score, as what used to be unthinkable is inching closer to reality.
Twenty-five years ago, the notion that the federal government could default or manipulate currency to fulfill obligations seemed absurd. Back then, discussions revolved around using a surplus—believe it or not. Now, devaluation and defaults seem to become more plausible with ideas like the trillion-dollar coin on the table.
The White House has taken notes from the Obama administration’s strategy in response to Moody’s latest critique, brushing off the downgrade as politically motivated. Their stance is that tax cuts and increased spending will lead to remarkable growth, similar to claims made during Trump’s first term about the impending debt crisis.
It’s unfortunate for Congress members that they lack a solid explanation for amassing over $5 trillion in new debt. There’s no crisis sort of excuse to mask the disconnect from financial reality. With five years of lessons about fiscal irresponsibility and inflation under their belts, there’s no modern financial trick that will resolve this.
But they seem undeterred. If a key vote goes against the party, you could risk a primary defeat next year. And if you’re merely coasting along, you might be on the verge of retirement before understanding what “AA1” truly means. By that time, you could find yourself paid to engage in discussions about fiscal policies, wondering why no one is taking it seriously.
