Moody’s Downgrades U.S. Government Credit from Triple to Double A

What Happened?

Moody’s analytics downgraded the U.S. government’s credit from triple to double A, following similar action by Fitch’s in 2023 and Standard and Poor in 2011. The ratings downgrade was based on several factors, but primarily about concerns of increasing debt in the near future if 2017 tax cuts are made permanent. 

In addition, Moody’s pointed to years of gridlock and dysfunction in the nation’s capital. It found that both major political parties had failed to meaningfully curtail U.S. debt, which is now above the $36 trillion mark.

Why it Matters

According to Spencer Hakimian, founder of Tolou Capital Management, the ratings downgrade by Moody’s will ‘eventually lead to higher borrowing costs for the public and private sector in the United States.’ In the short term the move sent ripples of uncertainty around the world, as turbulent trading hit financial markets on Monday, with investors selling U.S. stocks and bonds and the dollar.

The move by Moody’s means all three of the major credit rating agencies no longer consider the U.S. government worthy of their highest credit rating. The dysfunction in Washington D.C. cited by Moody’s is real. Both major political parties like to blame each other for mounting debt, but they both exhibit similar behavior. When their party has the White House, deficits don’t matter and when the opposition has the presidency, deficits are suddenly important. 

Consequently the U.S. government often ends up with the worst of both worlds. Increased spending continues as the federal budget grows each year along with increased tax cuts. Taken together those two steps can only add up to increased deficits, which ultimately are not sustainable, even by the U.S. government. The ratings agencies have done the math and come to the conclusion that the U.S. government is on an unsustainable fiscal path. 

The U.S. government finances its debt by issuing bonds which are often bought by foreign investors because they offer solid returns and nearly no risk. To date, the U.S. government has never missed a payment on its growing debt. Lower ratings could lead to fewer buyers for U.S. bonds and hence could limit the government’s ability to continue financings its growing debt.

But the federal government is on a fiscal trajectory that will eventually mean the government is no longer able to pay its bills on time. Due to proposed increases in defense spending and already legislated increases in entitlements (social security), in tandem with a push to make large tax cuts permanent. Which is why Moody’s issued the downgrade in credit rating.

How it Affects You

In the short term, the move by Moody’s is unlikely to have any noticeable consequences for the U.S. government or the American people. But in the long run, the downgrading of the credit of the U.S. government points to fiscally dire consequences for both.