The Implications of the US Credit Downgrade
Bottom Line: The only thing less fun than talking about personal debt is likely talking about the country’s debt. But debt matters. Anyone who has ever had any, which is almost everyone, knows this. But seemingly, throughout the course of all of our lifetimes, no matter how high US deficits were or how large the federal debt became, it really didn’t seem to matter. At least not on a personal level anyway. Except that was always untrue. Federal deficit spending and the US National Debt have always impacted us all of the time. It's just that until we began to experience 40+ year high inflation driven in large part by federal debt spending, not many people knew this and even fewer noticed. Interest rates and economic growth have always been directly influenced by debt and deficit spending by the federal government. And now, following an inflation crisis brought about by artificial demand fueled by federal debt spending, which we’re still in the process of attempting to recover from – there are even bigger issues on the horizon as outlined by the credit ratings agency Fitch.
Our federal debt and deficit is in reality not different than personal debt and deficit spending. It works, until it doesn’t. In the case of personal debt, you’re able to spend freely accumulating debt for as long as lenders will continue to extend credit to you and for as long as you can manage to meet the minimum monthly payments. The federal government is no different. Yes, they can print money at will (or digitize it as the case happens to be), but there are consequences for doing that which work similarly to personal finances. Diluting the existing monetary supply with more money makes existing dollars worth less raising the rate of inflation, which leads to higher interest rates, which raises the costs for the federal government to service the existing debt the Treasury Department is making monthly payments on as well. This is the very cycle our country has found itself in. And perhaps then it’s no surprise that with having experienced 40+ year high inflation amid record deficit spending and a record National debt that’s rapidly rising we’re starting to see signs of financial stress within our system.
For just the 2nd time in American history the US credit rating has been cut from AAA status by a credit ratings agency. And it’s the first which hasn’t specifically coincided with a debt ceiling debate. You may recall that a primary argument for a debt ceiling deal this spring was so that the US would avoid a credit rating downgrade. As I pointed out at the time, consider the absurdity of suggesting that the only way to resolve a potential debt crisis is by spending even more money and taking on even more debt. But that’s what happened, and now that’s happened – the credit rating downgrade - anyway. And that’s because we’re in the early days of seeing that what we’ve been doing as a country from a debt management perspective doesn’t work.
Fitch cited: 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. Cuts to non-defense discretionary spending (15% of total federal spending) as agreed in the Fiscal Responsibility Act offer only a modest improvement to the medium-term fiscal outlook. In other words, our reckless out of control federal spending is becoming unsustainable. The impact of the downgrade was felt immediately in the financial markets yesterday – led by a sharp stock market selloff. The impacts will slowly but surely begin to reverberate through the economy more broadly if we continue down this path. Debt matters. Who we elect matters. How much they spend when they get to Washington matters. Starting with the impact of inflation, we’ve begun to pay a heavy price for all of the “free” stuff that’s anything but free that our federal government has been handing out for years.