American debt got another thumbs down from a noted credit rating agency this month.
Moody’s, one of the big three of rating agencies, was the last one of the trio to downgrade US debt. The Wall Street Journal’s editorial board described their decision this way:
Moody’s downgraded U.S. debt to a notch below its top rating, citing chronic budget deficits and rising debt-service costs. The rating agency lagged behind S&P Global Ratings and Fitch, which downgraded the U.S. in 2011 and 2023, respectively. Moody’s may have been late because it believes in the Keynesian model that government spending lifts economic growth.1
Another leading voice sounding the alarm over mounting US government debt has been Bridgewater Associates founder Ray Dalio. He believes that the risks around US debt are “greater than the rating agencies are conveying” because they “don’t include the greater risk that the countries in debt will print money to pay their debts thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting)”.2
Others are not as convinced that the decrease in credit rating is something to freak out over. Cullen Roche, over at Disciplined Funds, writes,
If the US government is a aa1 entity then that’s the new AAA because every other entity on this planet must have a lower credit rating given that nothing comes remotely close to having the same levels of income and credibility.3
He outlines three facts, which are worth quoting at length, that show the uniqueness of the US government’s debt situation among other countries in the world:
1. The USA, like all fiat currency issuing governments has a printing press. It cannot run out of the money it can create.
2. The USA is especially unique in this sense because not only can it print this currency, but it can tax the wealthiest private sector that has ever existed. Let’s put some figures on this. The US government generates $5 trillion of revenue every year from taxation. The next closest country is Japan, which generates $1.5T. Germany’s central government generates $550B+ per year. So the USA is 10X bigger than the country that many people cite as one of the most fiscally responsible entities in the world. The important conclusion here is that the US government isn’t special because it has a printing press. It’s special because it just so happens to be the entity that can tax the wealthiest private sector in human history. So, it has access to taxing a private sector that has $200T of total net worth. The incredible financial prowess of our private sector is what makes US government debt unique.
3. The USA doesn’t borrow in a foreign currency and cannot be forced to pay debts in something it cannot either create or tax vast amounts of.4
US Treasuries are hard to resist because the brand worldwide—for reasons like Roche says—is bigger than the decisions of credit agencies. Matt Levine, former investment banker and a Bloomberg columnist, writes,
You could imagine a lot of investors having mandates or contracts or regulatory requirements saying “you can only hold debt rated Aaa by Moody’s,” and having to dump US Treasuries on the downgrade, but empirically that seems mostly not to be true. Instead, most of the relevant regimes are more like “you can only hold debt with a rating of at least ____, but also you can hold US Treasuries no matter what, those are Treasuries.” So the downgrade doesn’t have the same effect on US government debt that it might have on a more normal issuer.5
Am I advocating for continued US spending and apathy toward our debt problem? Of course not.
It has reached historic levels as a percentage of GDP.
Bond yields have also spiked a bit in 30-year Treasuries, which can be concerning if it continues.
Let’s be honest though, until all of this is a priority for both Democrats and Republicans, it’s not likely to be reduced because both parties have a bad record of solving the fiscal crisis. Here is the data according to Investopedia6:
How has the stock market responded to these downgrades over the last decade or so?
Initially, not great, but over the long-term, it has all but ignored them.
The American economy continues to be a bulwark in the world. According to Tyler Cowen, Holbert L. Harris Professor of Economics at George Mason University, the recent breakthroughs in AI may not only boost the economy in America but mitigate our debt debacle. In one interview he hypothesized,
If AI makes most things more productive…you know we will be able to pull [dealing with our debt] off or at least roll it over. So, I’m not a mega pessimist on the debt. I think there is a very good chance we will squeak by in spite of ourselves because the deus ex machina came along: here’s AI… It’s going to pay the bills.7
One can hope.
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Sources:
1. “Washington Deserved a Downgrade”, May 19, 2025. Accessed online: https://www.wsj.com/opinion/moodys-rating-downgrade-united-states-credit-debt-spending-washington-e1eb2d56?mod=hp_opin_pos_1
2. “Ray Dalio says the risk to the U.S. Treasurys is even greater than what Moody’s is saying”, via CNBC on May 19, 2025. Accessed online: https://www.cnbc.com/2025/05/19/ray-dalio-says-risk-to-us-treasuries-greater-than-what-moodys-says.html
3. “Three Things – Downgrading the Weekend”, May 17, 2025. Accessed online: https://disciplinefunds.com/2025/05/17/three-things-downgrading-the-weekend/
4. Ibid.
5. “Get Your Research From an AI Video”, Matt Levine, May 20, 2025. Accessed online: https://www.bloomberg.com/opinion/newsletters/2025-05-20/get-your-research-from-an-ai-video
6. “Democrats vs. Republicans: Who Had More National Debt?”, December 16, 2024. Accessed online: https://www.investopedia.com/democrats-vs-republicans-who-had-more-national-debt-8738104
7. “Can AI Fix Our Debt Problem? | Tyler Cowen” on the Julia La Roche Show, July 11, 2024. Accessed online: https://youtu.be/tyQfiSQgqNM?si=ENERGBxN22atwOqA
30-year Treasury chart from the Wall Street Journal. Accessed online: https://www.wsj.com/finance/investing/the-bond-market-is-waking-up-to-the-fiscal-mess-in-washington-fcebd153