S&P Global Ratings stripped the United States of its coveted AAA credit rating in 2011, and Fitch Ratings did the same in 2023.
Given how the country’s finances have only worsened since, it was only a matter of time before the third major ratings firm, Moody’s Investors Service, fell in line and did the same.
That moment came late Friday afternoon after markets closed for the week, when Moody’s, like S&P and Fitch, lowered the rating one level, to Aa1.
The action “reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” Moody’s said in a statement.
“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.”
To be clear, there is next to zero chance the government won’t be able to pay its creditors, and as was demonstrated after the actions by S&P and Fitch, the Treasury Department’s access to funding is determined by forces beyond some letters in a ratings report.
Indeed, foreign holders about doubled their holdings of Treasuries since 2011 to more than US$9 trillion and have added about US$1.5 trillion to their holdings since 2023, according to the Treasury Department.
The dollar remains the world’s primary reserve currency, with a 58% share, almost tripled that of the euro and its 20% share.
Complacent attitude
So although Moody’s action said next to nothing about America’s creditworthiness, it does underscore the country’s increasingly complacent attitude toward rising debt and trillion-dollar budget deficits.
The United States has already added about US$13 trillion of debt since 2019 to support the economy through the pandemic and underwrite the agendas of presidents Donald Trump and Joe Biden, bringing the total to some US$36 trillion.
Now consider the budget bill that House Republicans are trying to push through right now.
The Committee for a Responsible Budget estimates the draft legislation out of the House Ways & Means Committee would add an additional US$3.3 trillion of debt and boost the annual budget deficit to more than 7% of gross domestic product (GDP) by 2034.
As it stands, federal debt held by the public was already forecast to rise from about 100% of GDP this year to 117% by 2034, but this House bill and its tax cuts and spending increases would push the ratio to 125%.
“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.” Moody’s said.
“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
It’s not that officials in Washington don’t know all this.
In May, US Treasury Secretary Scott Bessent told lawmakers that the country’s debt and deficits were on an unsustainable trajectory.
Scary numbers
“The debt numbers are indeed scary,” and a crisis would involve “a sudden stop in the economy as credit would disappear,” he said. “I’m committed to that not happening.”
And yet, the Trump administration is doing nothing to put the country on a more fiscally sustainable path beyond declaring that extending the Tax Cuts and Jobs Act from President Donald Trump’s first administration in 2017 would spur the economy and raise more revenue for the government.
To Moody’s, that’s wishful thinking. “Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits,” the firm said.
“During that time, federal spending has increased while tax cuts have reduced government revenues.
“As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.”
That last point by Moody’s may be the most important one in its action last Friday.
Rising interest rates meant that the United States spent some US$1.13 trillion servicing its debt in 2024, almost doubling in recent years.
The concern is that federal debt gets so high that tax revenue is insufficient to cover interest expense, and the government will forced to borrow just to meet those payments.
This is a scenario that economists refer to as a “debt bomb”.
The good news is that the US’s worsening finances have been no secret, and yet investors the world over have piled into Treasuries, the dollar and equities.
Last Friday, the Treasury said foreign investors added US$233bil to their holdings of US government debt in March after having added US$257bil in February.
This marked the two biggest back-to-back months for purchases on record.
Cautionary tales
History provides many cautionary examples of great empires and countries that are no more because of their propensity for fiscal profligacy.
And when the money spigots are turned off, the populace revolts.
It’s discouraging that few in Washington are taking the issue seriously, deciding to govern in the moment rather than with an eye on the future.
Just because the United States is the undisputed leader in the global economy now, there’s no guarantee it will be in the future. — Bloomberg
Robert Burgess is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
