The COVID pandemic turned the global economy upside-down. As resilient as the U.S. economy was going into the pandemic, that does not mean the U.S. economy remained immune. Most states in the Union decided to lock down the economy in response to COVID, which cost the U.S. economy a whopping $9.2 trillion. Supply chains were thrown out of whack enough to create a supply chain crisis. If that were not enough, a combination of the Federal Reserve pumping trillions of dollars into the economy along with the government spending trillions on so-called "pandemic relief" caused the inflation spike we see to this day. This debt ceiling debacle earlier this year exposed how out of control the U.S. debt situation is getting.
It seems that people have been noticing this dysfunction, including credit rating agencies. That would explain Fitch's downgrade of the U.S. government's formerly stellar credit rating of "AAA" to "AA+." This is the second downgrade from one of the major three credit rating agencies since the practice of credit ratings really took off in the early 20th century. The first downgrade was by Standard and Poor's in 2011. Why did Fitch's decide to downgrade now? According to its rating action commentary, Fitch's had the following to say:
"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."
The good news is that Fitch's overall outlook is stable. That might have to with a well-diversified and high-income economy, dynamic business environment, and the fact that the U.S. dollar is still the predominant reserve currency. This means that for the time being, the United States still remains an overall trustworthy economic powerhouse. At the same time, there are legitimate concerns. In the short-term, the Federal Reserve is not finished with raising interest rates. This plays into why Fitch's is anticipating a mild recession later this winter.
Fitch's bring up how the debt-related political standoffs and last-minute resolutions have eroded trust in the U.S. Congress of doing its job to ensure as basic of a function as fiscal management. This is not about mere discontent of how the U.S. government approaches the debt ceiling. It is about the bigger picture. There is no medium-term plan to deal with the country's fiscal challenges. As I have brought up more than once, the debt-to-GDP ratio is rising by government deficits and shows no indication of falling. We have doubled our debt in the past decade, which is a good way to corrode trust in future lenders. The national debt is projected to be double the size of the U.S. economy in thirty years, which does not inspire confidence. Not addressing these failings will have negative impact on U.S. economic growth, which will affect the lives of everyday U.S. citizens.
This downgrade in the credit rating may be temporary or the United States will be in a lot of hurt in the long-run. If the government wants to get a handle on its fiscal state, it would find real reforms for the three main drivers of U.S. public debt: Social Security, Medicare, and Medicaid. What I do know is that if the United States wishes to be the economic powerhouse it has been since the mid-20th century, it needs to get in touch with the tradition of fiscal discipline and fast. Otherwise, the likely path will be more credit downgrades and the United States economy ending up like that of Argentina or Greece.
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