Was Fitch Ratings right to downgrade USA’s triple-A rating?

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on Aug 2, 2023
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  • Fitch Ratings downgraded America’s triple-A rating on Tuesday.
  • The agency cited the country’s soaring debt burden and growing deficits.
  • Public debt is expected to hit $50 trillion in the next few years.

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Fitch, the ratings agency owned by Hearst, made an important announcement that will have a major impact in finance. The company, one of the big three, decided to lower America’s credit rating from AAA to AA+. Other agencies like Moody’s and S&P Global have maintained their strong ratings.

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Fitch downgrades the US

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In its statement, Fitch Ratings warned that the American economy was at risk as public debt and deficits jumped to a record high. The rating downgrade came less than two months after the US narrowly avoided a default as the government ran out of cash.

The US avoided a default after legislators passed a deal to suspend the debt ceiling for two years. Since the deal was passed, the US has already borrowed over a trillion, bringing the debt to over $32 trillion.

The decision to downgrade the US had mixed reactions, with Secretary Janet Yellen blasting the move. Similarly, Larry Summers, who led the Treasury under Obama and accurately predicted inflation during the pandemic said:

“The United States faces serious long-run fiscal challenges. But the decision of a credit rating agency today, as the economy looks stronger than expected, to downgrade the United States is bizarre and inept,”

Was Fitch right to downgrade the US?

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I believe that Fitch was right to downgrade the US, which will lead to higher borrowing costs in the credit market.

First, as I wrote here, the country’s public debt is soaring at an unprecedented rate. Data shows that the US has over $32 trillion in debt a significant increase from a few years ago. For example, the country had $13 trillion in debt in 2010. This means that it has borrowed over $20 trillion in three year.

In this situation, it would make sense if the US was lowering its debt burden. Sadly, all signs are that the budget deficit will continue in the coming years. Fitch estimates that deficit will be 6.6% of GDP in 2024 and 6.9% in 2025. Therefore, as I wrote in my article on gold, US debt will surge to over $52 trillion by 2033. 

Second, the US will struggle to pay back its debt if interest rates remain this high. The US is expected to spend over $1 trillion in debt repayments this year. This is a significant amount since the government collects less than $5 trillion in taxes. Keep in mind that social security funds are expected to run out by 2034. In its report, Fitch said:

“Over the next decade, higher interest rates and the rising debt stock will increase the interest service burden, while an aging population and rising healthcare costs will raise spending on the elderly absent fiscal policy reforms.”

Finally, the US is unwilling to do the right thing to reduce public debt. In this case, the right thing would be to reduce spending and boost revenue by hiking taxes. The government, under both Republicans and Democrats, are unwilling to cut spending. 

For example, military spending, which has failed audits over the years, is set to cross $1 trillion in the next decade. It now stands at over $800 billion. 

Therefore, I believe that Fitch was right to downgrade the US from Triple A to Double A+ because of the country’s fiscal irresponsibility.

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