The timing of the indictment of former President Donald Trump could not be more suspicious.
Not only is the event taking the media heat off the Biden news related to alleged foreign influence peddling, but it is also providing a distraction from a historic credit downgrade for this nation.
Fitch Ratings downgraded the United States’ long-term foreign currency issuer default rating to AA+ from AAA on Tuesday, pointing to “expected fiscal deterioration over the next three years,” an erosion of governance and a growing general debt burden.“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” said Fitch.In May, the agency placed the nation’s AAA rating on negative watch, blaming the debt ceiling fight. At the time, lawmakers in Washington butted heads over an agreement that would keep the federal government from running out of money. President Joe Biden signed the debt ceiling bill on June 2, just days away from the “X-date” on June 5.The country’s recent debt limit feud was mentioned again in Tuesday’s downgrade.“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the ratings agency said.
I highlighted the last 20 years portion of the Fitch analysis. Both parties have kicked the fiscal responsibility can down the road and right off the cliff for the past 2 decades. However, under the clearly deteriorating Biden presidency, the rating firm feels free to offer its honest assessment.
Fitch Ratings Inc. is an American credit rating agency and is one of the “Big Three credit rating agencies,” which currently has assigned “stable” forecasts. The other two are Moody’s (the US still has a AAA rating there) and Standard & Poor’s (which shares Fitch’s AA+ assignment).
Several other nations retain the AAA designation.
Economies with the highest credit rating at S&P Global Ratings, Fitch and Moody’s Investors Service include Germany, Denmark, Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore and Australia. Canada is rated AAA by two of the ratings companies.
Stocks fell on the news.
The Dow closed 348 points, or 1%, lower in Wednesday trading. The S&P 500 fell 1.4% and the Nasdaq dropped 2.2%, marking its worst performance since February.The 10-year Treasury yield hit its highest level since November. Bond prices and yields move in opposite directions, so falling Treasuries boost yields.Tech megacap stocks like Amazon, Meta, Microsoft, Tesla, Nvidia and Apple led market declines. Because the tech sector is so forward-facing, it’s particularly sensitive to interest rate changes.
The Democrats were quick to blame the Republicans for the downgrade.
In a statement, press secretary Karine Jean-Pierre said the White House “strongly” disagreed with the decision to downgrade, saying that it “defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world.””And it’s clear that extremism by Republican officials — from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations — is a continued threat to our economy,” Jean-Pierre said.
Our “expert” economists are outraged at the new rating. They also believe that the move will not have any significant impact in the long term.
High-profile economists including former U.S. Treasury Secretary Larry Summers and Allianz Chief Economic Advisor Mohamed El-Erian lambasted the Fitch decision, with Summers calling it “bizarre and inept” and El-Erian “perplexed” by the timing and reasoning. Current Treasury Secretary Janet Yellen described the downgrade as “outdated.”Goldman Sachs Chief Political Economist Alec Phillips was also quick to point out that the decision did not rely on new fiscal information and is therefore not expected to have a lasting impact on market sentiment beyond immediate shock selling on Wednesday.Phillips said the downgrade “should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change.”“Fitch’s projections are similar to our own — they imply a federal deficit of around 6% of GDP over the next few years — and Fitch cites CBO (collateralized bond obligation) projections in its medium-term outlook, so the downgrade does not reflect new information or a major difference of opinion about the fiscal outlook,” he said in a note Tuesday.
The gross federal debt of the United States has surpassed $32 trillion as of June of this year. There is plenty of talk of debt-ceiling limits and cutting waste/fraud/abuse from the budgets, but no action.
The only solutions to this situation appear to be the Biden team threatening Fitch Ratings in some way or encouraging bipartisan cooperation that reduces spending and encourages economic growth. I know which one I am betting on.
How much lower can our ratings go? With Biden, the Mariana Trench of depths is possible.
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