Moody’s held in there the longest, but it had to acknowledge what the other financial ratings houses had said before: The United States government isn’t serious about dealing with the debt that is eating it alive.
Standard & Poor’s dropped the dime on Uncle Sam in 2011. That was after the government borrowed more than a trillion dollars to bail out banks and to pump out a massive stimulus surge in response to a financial panic — a panic it had helped create by underwriting bad mortgage loans.
The downgrade came not with the stimulus and the bailouts, but with the decision to follow them up with long-term, deficit-financed spending on a new health insurance program and other goodies. It wasn’t the crisis, it was the not-letting-the-crisis-go-to-waste part.
S&P got a good kick in the teeth from the Obama administration, which publicly trashed the firm’s reputation and accused the rating house of playing politics after privately pressuring S&P not to announce the ratings change. Incensed, Republicans accused team Obama of working the refs and launched a congressional probe into the possibility that the Treasury Department had used undue influence to try to avoid the black eye.
But both parties were to blame since a newly elected House Republican majority had balked at a “grand bargain” on taxes and spending. The decision to walk away left the two sides reduced to grinding out small, tit-for-tat spending deals around periodic government shutdowns.
That grind, combined with some big talk about forcing future compromises (which, of course, never materialized) worked well enough to keep the other two big ratings houses in line for quite a while. Plus, they saw the blowback S&P took from the Obama White House and probably didn’t want the heat. It also helped that shortly after the S&P downgrade, America went into a kind of augmented reality on fiscal matters. Things kept getting worse, but allegedly smart people kept saying that it didn’t really matter.
These were the times of imaginary $1 trillion coins and modern monetary policy run amok.
If the United States had the world’s largest economy and was the planet’s apex military power, then our government’s creditworthiness wasn’t really a problem. The only imaginable downside with perpetually running huge deficits was that so much money sloshing around could trigger inflation, but the Federal Reserve had that all figured out, don’t you know. The bankers could prevent inflation through dexterous manipulation of the bank’s balance sheet. It’s not like it would have to start jacking up interest rates again like it was 1981, right?
That was the realm of magical thinking in which Republicans returned to unified control of Washington in 2017 and went on a bender of cutting taxes and increasing spending, running deficits of nearly $1 trillion even when the economy was growing faster than it had in a decade. Soaring tax revenues couldn’t keep pace with the bipartisan fiscal fantasy that had ensorcelled the federal city.
When trouble arrived in 2020 in the form of a pandemic, the proposed responses ranged from the profligate to the just plain wild. But even that wasn’t enough to earn another credit downgrade.
It wasn’t until 2023 that Fitch’s took the leap. The story was similar to the S&P saga of 2011. It wasn’t so much the bipartisan geyser of pandemic-related stimulus and bailouts. It was the fact that after the gusher subsided, the White House and Congress kept looking for ways to do even more long-term, debt-financed spending. Even as inflation was crushing consumers and the Fed was constricting markets with rate hikes, the deficits just kept on rolling.
They called it Build Back Better, or BBB. But it cost the feds their second AAA.
Which brings us to today and folks at the venerable Moody’s saying something that has been so obvious for so long that they couldn’t keep any credibility without acknowledging it. The United States doesn’t deserve a perfect credit score because the once unthinkable is getting dangerously close to reality.
Twenty-five years ago, the idea that the federal government might default on some of its loans or intentionally devalue its currency in order to pay debts back on the cheap would have sounded preposterous. The debate back then was how to spend a surplus, if you can believe it. Now, currency devaluation and strategic default are talked about like that $1 trillion coin was a decade ago.
The White House is following the Obama playbook on this latest indignity from Moody’s and dismissing the ratings drop as some kind of a political stunt. The official line is that the tax cuts and new spending being extruded like dried out Play-Doh by Congress will fuel such amazing growth that the government will just grow its way out of the debt. Which is what they said about the debt bomb in Trump’s first term.
It’s a pity for the members of Congress that they don’t have a convenient excuse at hand to explain why they’re trying to pack on what may end up being more than $5 trillion in new debt. There’s no panic or pandemic to let them absent themselves from economic reality. Worse still, Americans have been getting a five-year lesson in the connection between fiscal irresponsibility and inflation. There’s no modern monetary magic to hide behind.
That won’t stop them from doing it, though. Buck your party on a key vote, and you might lose your primary next year. If you just go along for the ride to insolvency, you’ll probably be retired before we find out what comes after “Aa1.” By then you can be a full-time talking head and get paid to complain about how nobody takes fiscal policy seriously anymore.