America just saw its credit rating drop. The Associated Press reported that Fitch Ratings downgraded the U.S. debt rating from AAA to AA. That was "a move that spurred debate in Washington about spending and tax policies." Fitch said the government's rising debt burden and the country's increasingly ugly political fights — including factors like the Jan. 6 Capitol riot and the recent brawl over raising the debt ceiling — were behind its decision to downgrade.
The announcement "startled lawmakers and policymakers alike," The Hill reported. Treasury Secretary Janet Yellen called Fitch's decision "puzzling" in light of the country's overall economic strength. The United States, she said, "remains the world's largest, most dynamic, and most innovative economy — with the strongest financial system in the world." Fitch officials defended the call: "Clearly, if you look at polarization with both parties … the Democrats have gone further left and Republicans further right, so the middle is kind of falling apart basically," said Richard Francis, a senior director at the rating service.
NBC News reported that the Biden administration cast blame on Republicans. "It's clear that extremism by Republican officials — from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations — is a continued threat to our economy," the White House said in a statement. Why did Fitch downgrade U.S. debt? What will it mean for taxpayers and investors?
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What are the commentators saying?
"Why is anyone surprised?" the Wall Street Journal asked in an editorial. Fitch's new rating "captures the unseriousness of America's economic decision-making." The federal deficit is growing by leaps and bounds — $1.39 trillion this fiscal year, up 169% from the year before. The problem is only going to get worse as Baby Boomers retire, but neither President Biden nor Donald Trump have shown any inclination to rein in entitlement spending. No wonder Fitch downgraded America's credit. "It's a no-confidence vote in U.S. political leaders, and that starts at the top."
"To whatever extent Fitch's downgrade is based on a perceived weakness in the economy, that's just wrong," Timothy Noah wrote at The New Republic. Still, the downgrade is no surprise: Republicans were behind the Jan. 6 insurrection, and Republicans have brought the country to the brink of insolvency several times over the last dozen years with debt ceiling showdowns during the Obama and Biden administrations. "In downgrading the U.S. from triple-A to AA+, Fitch is merely acknowledging the Republican chaos we've all witnessed."
There's no reason to panic, The Washington Post editorialized, but Americans "should not dismiss concerns about the national debt's long-term trajectory." That said, Fitch's rationale was flawed: There may be fights over finances and the debt ceiling but lawmakers haven't ever actually defaulted on U.S. debt obligations. For investors, "U.S. debt remains one of the safest assets on the planet." American leaders would still be wise to rein in the country's spending, however. "No one knows when or whether the debt will reach a crisis point, but the risks grow as the debt level swells."
What's next?
The bottom-line question: Will Fitch's lower rating make it more expensive for the U.S. government to borrow money? Probably not for now, Fortune reported. Usually, a credit downgrade forces debt issuers — in this case, the American government — to pay investors a higher interest rate "to compensate for the potentially higher risk of default." That doesn't seem to be a short-term risk: "Few economists think that such an outcome will actually occur." The U.S. government bond market has long been one of the safest places for investors to park their money. Even with the rating downgrade, "U.S. Treasury securities are essentially in a class by themselves."
Still, the initial reaction to Fitch's downgrade was expectedly bad: Stock markets slumped after the announcement. But the New York Times reported the lower rating is unlikely to deter investors from continuing to buy up U.S.-issued securities. Even after the downgrade, after all, America's credit rating "remains among the highest in the world." The problem is that more fiscal showdowns between Republicans and Democrats in Congress are probably on the way: A government shutdown could happen as soon as this fall.
