Fitch Ratings made a surprising announcement on Tuesday, downgrading U.S. government debt from AAA to AA+ at a time when the nation’s attention was focused on former president Donald Trump’s indictment. However, it’s important to note that the current economic news has been positive, with the Federal Reserve and many on Wall Street no longer predicting a recession. While the United States does have a long-term debt problem, it has improved slightly in recent months due to efforts from President Biden and House Republicans to avert a debt ceiling crisis. Additionally, the U.S. economy has performed better than expected. Overall, this actually makes U.S. debt more attractive.
While it’s important not to panic, concerns about the national debt’s long-term trajectory should not be dismissed. Here are the three key takeaways from the Fitch news:
1. Flawed rationale: Fitch based its downgrade on several factors, including an “erosion of governance,” “fiscal deterioration” expected in the next three years, and a growing government debt burden. Though the third reason holds some merit, it’s not as if the debt outlook suddenly worsened. It has been known for years that costs would increase for programs such as Social Security and Medicare as the baby boomer generation retires. Fitch’s predictions of tough years ahead are largely based on outdated forecasts of an imminent recession. Lawmakers have also shown their willingness to negotiate and avoid defaulting on U.S. debt obligations. Furthermore, President Biden has launched a White House working group to address future debt ceiling issues. Overall, U.S. debt remains a safe asset.
2. Minimal impact: The downgrade has not caused significant concern among Wall Street investors, as U.S. government debt is still seen as a desirable investment. Treasury Secretary Janet L. Yellen emphasizes that “Treasury securities remain the world’s preeminent safe and liquid asset.” Many major investors, such as pension funds and banks, are required to invest in safe assets, and U.S. debt still qualifies, despite the slight downgrade.
3. Need for reform: The lack of a substantial short-term response to Fitch’s debt downgrade should not lead to complacency regarding the nation’s long-term trajectory. Two of the country’s leading bond rating agencies, Fitch and S&P Global Ratings, have now given U.S. debt a slightly diminished rating. To prove these agencies wrong, lawmakers must start addressing the country’s long-term fiscal challenges, starting with Social Security. Costs are rising faster than revenue, especially due to an aging population. The Congressional Budget Office warns that U.S. debt as a share of the economy is on track to surpass even World War II levels by 2029. Rising debt and interest costs can harm the economy, diverting national wealth towards debt service instead of public and private investments in areas that can drive growth, such as research, infrastructure, and education. Additionally, Social Security may not be able to make full payments to retirees after 2034 unless changes are made soon. A plan to stabilize the national debt, including raising taxes, reducing costs, and making adjustments to Social Security and Medicare, is necessary. Congress must act sooner rather than later to avoid greater sacrifices for Americans in the future.
In conclusion, while Fitch’s downgrade of U.S. government debt may have caused a stir, it is important to consider the overall economic landscape and not overreact. The U.S. debt remains a safe investment, and the downgrade should serve as a reminder to address the long-term fiscal challenges the country faces.
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