Commentary:
Along with Moody’s and Standard & Poor’s, Fitch Ratings is one of the three major international credit rating agencies. Recently, Fitch downgraded the credit rating for the United States government one level from AAA to AA+. The rating system rates the ability of a borrower to pay back debt against the possibility of default. The company cited rising government debt at local, state, and federal levels. It also believes that the U.S. will enter a mild recession in the near future. More chillingly, it also justified its action due to what it termed “a steady deterioration in standards of government.” This is only the second time in U.S. history that the nation’s debt rating has been degraded, the last being in 2011, when Standard & Poor’s lowered the country’s AAA rating because of the standoff over the federal government’s spending limit.
Fitch’s move is much like what happens to a person’s credit score when they constantly make payments late or pile up too much personal debt. This can result in limited access to credit, being refused credit on higher dollar purchases, such as a house or car, and/or paying higher interest rates on lines of credit or loans. However, unlike a person’s credit rating, Fitch’s action can affect the entire country.
It is unknown to what extent the implications Fitch’s downgrading of the U.S.’s credit rating will have on the country. In the short-term, we will probably not see any drastic change moving from AAA to AA+. However, in the longer-term we could definitely see some effects. When the U.S. takes on debt to finance its budget or projects, it might have to pay higher interest rates on this debt. This will make borrowing more expensive for the U.S. government. According to the Department of the Treasury’s website, the national debt, or the total amount of outstanding borrowing by the federal government, is $32.6 trillion dollars. Even a slight increase on instruments such as Treasury securities can result in billions and eventually trillions of extra debt.
Since the end of WWII, countries around the globe have used the dollar as a preferred currency, because it has remained generally stable and high in value. They also have purchased U.S. treasury notes during times of prosperity and turmoil, as a method in which to store and protect their wealth. Stable economic indicators and confidence in the stability of the U.S. government has attracted trillions of dollars of foreign investment in the U.S., in terms of businesses, infrastructure, and the purchasing of Treasury securities.
Perhaps the most troubling aspect of Fitch’s downgrade is the message it sends to the world about our country’s discipline and security. Fitch backed up its words of “steady deterioration in standards of governance,” by referencing two factors. The first mentioned was worsening stalemates surrounding spending and tax policy – a-not-so hidden reference to the battle lines and inflexibility in negotiations that have developed between Democrats and Republicans. Fitch claims that the ability of the U.S. to govern has worsened compared to other countries, which enjoy high credit ratings. Last year, Fitch published a report that said that U.S. government stability particularly decreased between the years 2018 and 2021.
Fitch also informed the Biden Administration when announcing its downgrade action that the January 6, 2021 insurrection and attack on the Capital was another factor. It claims that this was evidence of a government that was not stable. Either way, this does not show the U.S. in its best light and sends a bad signal to the rest of the world, which seems to be in a particular state of global crises that we are bombarded with every day. Crises in other parts of the world can lead countries to bring their assets to the U.S. or choose Treasury securities as their preferred safe investment.
During the past two decades, China has been investing in infrastructure projects all over the world, or lending countries money to do so. At the same time, it has been promoting its national currency, the yuan, as a safe way for countries to hold their wealth and exchange their currency. While we are not in an armed conflict with China, we are in the middle of an economic war that has become ugly. The downgrading of the U.S. credit rating can only embolden China to push its currency and economic agenda around the world.
If there is a lesson to be learned from Fitch’s downgrade, it is that petty politics for the interest of political parties and not for the benefit of the U.S. has its consequences. Paying more for federal debt means the more debt we leave for our children to suffer. This will affect the accumulation of wealth by Americans in the future. It can also lead to new infrastructure not being constructed and existing infrastructure not being upgraded. What this really shows is that we are the only ones with the power to destroy this country from the inside.
Jerry Pacheco's opinions are his own and do not necessarily reflect the views of KRWG Public Media or NMSU.