President Biden is flabbergasted by downgraded U.S. credit ratings as public debt nears $33 trillion
This Wednesday is not a good day for U.S. financial markets. The stock market plunged after the news was given that the U.S. credit rating has been downgraded. The S&P 500 was trading at about 4,550 and the 10-year government bond was trading at about 4.08%.
Indeed, on August 1, 2023, Fitch Ratings downgraded the United States' long-term credit rating from AAA to AA+. This is the second time in U.S. history that a credit rating firm has downgraded the US's credit rating. The first time was in 2011, when Standard & Poor's downgraded the US from AAA to AA-. And as of August 2, 2023, the national debt of the United States was $32.8 trillion. The debt has been growing steadily for decades and it is not at its highest level in history.
Fitch Ratings cited two main reasons for the downgrade. First, the expected fiscal deterioration over the next three years, due to rising debt levels and an aging population, and second; the erosion of governance standards, as evidenced by the repeated debt ceiling standoffs that have occurred in recent years.
The downgrade is a blow to the US’s reputation as a safe and reliable borrower. It could also make it more expensive for the US government to borrow money, as investors will demand a higher interest rate to compensate for the increased risk. The Biden administration has criticized the downgrade, calling it “arbitrary” and “unjustified.” Moreover, President Biden said that the downgrade was a “reflection of the dysfunction in Washington” and that it was “a reminder of the stakes in the upcoming midterm elections.” However, Fitch’s decision is likely to have a negative impact on the US economy, as it could lead to higher interest rates and slower growth.
Credit ratings have a significant impact on the stock market. A downgrade in a company's or country’s credit rating can lead to a sell-off in its stock price, as investors become more risk-averse. This is because a downgrade indicates that the company or the country is more likely to default on its debt, which would reduce the value of its stock. For example, in 2011, when Standard & Poor's downgraded the US credit rating from AAA to AA-, the S&P 500 fell by 6.5% on the day of the downgrade. The market recovered somewhat in the following days, but it took several months for the index to return to its previous level.
The growth of the national debt is a serious conundrum that cannot continuously be ignored. The more the national debt increase, the lower becomes our purchasing power, and the poorer becomes the American consumer. The main way to pump the brake on the growth of the national debt is to cut government spending. Will President Biden be willing to cut spending?
He claimed that the rating was unfair but how can it be unfair when you consistently increase government spending through excessive borrowing? Actions have consequences so President Biden shall not act flabbergasted as if he did not see this coming. We cannot expect the national debt to decline when the U.S. government keeps increasing spending. If President Biden is seriously concerned about the growth of the national debt, he will have no choice but to apply contractionary fiscal policy to mitigate risks, and deleverage the balance sheet of the U.S. government.