The Biden administration is very frustrated with the credit rating of Fitch Ratings. Fitch Ratings is a credit rating agency that provides independent opinions on the creditworthiness of debt issuers. It is one of the "Big Three" credit rating agencies, along with Moody's and Standard & Poor's.
On August 2, 2023, Fitch Ratings downgraded the U.S. credit ratings. It argued that the level of the U.S. national debt was far too high, the highest it has ever been since the United States exists as a country, and the repeated debt ceiling standoffs led to the erosion of governance standards. To sum up, this downgrade is a problem for the United States’ reputation, which is known to be a safer and more reliable borrower. Thus, this downgrade could make it more expensive for the United States to borrow money, as investors will demand a higher interest rate to compensate for the increased risk.
The Biden administration expressed great frustration following the release of the grading report. President Biden and Secretary Yellen both expressed their staunch disagreement with the rating report. President Biden claimed that the rating was “unfair” and “unjustified” while Secretary Yellen claimed that Fitch’s rating was “inaccurate.”
Furthermore, prominent financiers such as JP Morgan Chase CEO Jamie Dimon called the downgrade ridiculous and said that it was “based on politics, not facts.” Dimon argued that the U.S. is still the most prosperous and secure nation on the planet and that its creditworthiness is not in question. He also said that the downgrade would have little impact on the U.S. economy.
Did Fitch Ratings correctly downgrade U.S. creditworthiness? Yes! The U.S. economy may be the most prosperous and safest nation in the world as Jamie Dimon stated, but it is still overleveraged, and that’s a real problem. In general, a debt-to-GDP ratio of around 60% is considered to be sustainable. However, a ratio of 70% or higher may be considered to be too high, according to the World Bank.
The current debt-to-GDP ratio is 118%. The current GDP of the United States is about $24 trillion while the current debt is $32.8 trillion. This means that the level of the national debt is significantly higher than the level of total output. It further means that the government is borrowing more money than it is producing, and it may have difficulty repaying its debts.
If the national debt is too high, then why is the President refusing to cut government spending? Because it is not politically viable. On economic grounds, it would make sense to reduce government spending as this will reduce the risk of government defaulting on its loans. But on political grounds, it would jeopardize President Biden’s reelection prospects. Thus, it pits political interests against economic interests.
If President Biden cuts government spending, then he risks losing a significant portion of his electorate, i.e. those who benefit from social programs such as Medicare, Medicaid, snap…etc., which could cost him his reelection. However, reducing government spending would no longer make it possible to have an overleveraged economy.
Deleveraging the economy can help to reduce inflation by reducing the amount of money in circulation. When government pays down debt, it essentially reduces the amount of money that it has available to spend. This reduces demand for goods and services, which can help to bring down prices.
Can we truly expect President Biden to willingly cut government spending? His reaction regarding the downgrade rating of U.S. creditworthiness tells us all we need to know. Instead of acknowledging that the government has gone too far in its spending, he doubles down by attempting to discredit a reputable and trustworthy agency that only did its job impartially.