The story behind America’s downgraded credit rating
Image: Cem Ozdel | Anadolu Agency
Much like a guy with short-term amnesia who keeps financing a boat, America’s credit score is trending in the wrong direction.
This week, credit agency Fitch downgraded the US government’s perfect AAA rating by one level to AA+. It’s the first time a major credit agency has downgraded the US since 2011, and the second such occurrence since national credit ratings were established in 1917.
Fitch says several factors influenced its decision:
- Erosion of governance. The agency cites a “steady deterioration” in US governance standards over the last 20 years, including repeated debt-limit political standoffs, a complex budgeting process, and limited progress on higher social security and Medicare costs due to an aging population.
- Rising government deficits and debt. The annual US deficit is projected to reach 6.3% of GDP in 2023, up from 3.7% last year, per Fitch. Meanwhile, total US debt currently stands at a record $32.6 trillion, or 113% of GDP, with net interest costs alone expected to become the single biggest line item in the federal budget within 30 years.
- Projections showing high interest rates and a recession in the near future. Fitch says it expects the Fed to raise interest rates one more time in September, then keep rates at that elevated level through at least March 2024. The agency is also predicting a mild US recession in Q4 2023 and Q1 2024.
💥 The (potential) impact: Many economists say the US is unlikely to face any long-term negative ramifications from Fitch’s downgrade alone. But if the other two major credit agencies follow suit, it would likely result in higher borrowing costs for the US government over the long-term, since bond buyers would demand greater return to offset the increased risk of default.
📊 Flash poll: How do you feel about Fitch’s decision to downgrade America’s credit rating to AA+?
See a 360° view of what media pundits are saying →
Sprinkles from the Left
- Some commentators argue that America shouldn’t panic at Fitch’s downgrade, which largely came from flawed rationale, but should let it inspire them to deal with the ever-growing problem of massive debt.
- Others contend that Fitch’s decision to downgrade America’s credit rating is poor optics for the world’s largest economy, but ultimately doesn’t mean a whole lot to everyday consumers unless something else drastically changes.
- “Three takeaways on Fitch’s weird downgrade of the U.S. credit rating” –WaPo Editorial Board
- “Fitch’s historic downgrade may be a black eye for the US but not much more” –Bryan Mena and Jeanne Sahadi, CNN
- “Why did the US credit rating just get dinged?” –Keren Landman, Vox
Sprinkles from the Right
- Some commentators argue that one of the largest problems with our current political system is the bipartisan belief in Washington that the US government’s debt is a second-order problem and that entitlement spending isn’t in need of reform.
- Others contend that America will eventually have to deal with its gargantuan levels of debt, which has a very high potential to cripple our country and its citizens for years to come.
- “America Downgraded” –National Review Editorial Board
- “Fitch Downgrades America” –WSJ Editorial Board
- “DC was rocked by 2 indictments this week. This could be the more consequential.” –Post & Courier Editorial Board
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