IT HAPPENED: US Credit Rating Lowered

In a move that has shocked markets globally, major credit rating Agency, Fitch, has lowered the US's long-term credit rating from AAA to AA+.  Key points mentioned:

  • They expect the US's general government deficit this year to rocket up to 6.3% of its GDP (it was just 3.7% last year)
  • They see an erosion in governance, plagued by political debt ceiling standoffs settled minutes before deadlines.
  • The situation is likely to get worse in the coming years.

The S&P500 suffered a 1.37% drop on yesterday’s candle, and the ASX has been taking notes.

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The last 20 years according to Fitch have seen a drop in standards for governance for the US, falling behind its peers. Increased spending alongside tax cuts have compounded the problem. Tackling the issues at hand would require a better framework, not to mention doing it within the country's more complicated budgeting process and frequent political stalemates. Ironically, they highlight Trump and the Jan. 6 insurrection as one of the major reasons for the downgrade. Although Fitch is simply a rating agency, the numbers and situations they summarise are hard to ignore.

They also aren’t alone. S&P downgraded the US to AA+ during the debt ceiling debacle in 2011 and China's leading rating agency, China Chengxin International Credit Rating, did so during this year’s down-to-the-wire debt ceiling debate. So we now have 3 of the largest global rating agencies having downgraded the issuer of the world’s reserve currency and issuer of the so called ‘risk free asset’ of US Treasuries. Risk free….

The US is similar to many other developed countries, having a large aging population. Those who think that most social programs are funded by the generation using them are in for a rude awakening. The current population needs to be able to bankroll the large aging population, meanwhile taking care of themselves and their children in a high cost of living environment, and now difficulty accessing credit.

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From Fitch: "We expect the general government (GG) deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden."

Interest rate hikes by the Fed are another compounding factor, which should not be a surprise.  They expect rates to peak at 5.75% in September and coincide with a mild recession lasting from the end of this year, until the first quarter of next year. Lower consumption, combined with weaker investment and tight credit conditions could make this likely.

They see the situation worsening through to 2025.  The US Government’s own Congressional Budget Office (CBO), based on current spending patterns and tax cuts, sees Social Security going broke in 2033 and Medicare Part A's funding source not far behind. Some major restructuring is a possibility, but this report shows that so far, it's only gotten worse. The threat of a lower rating is not new and has happened before, almost purely from parties using it as a debate tool instead of constructively addressing it.

From the CBO themselves (!):

Those who truly understand how a debt-based currency works, in contrast to sound money, understand that this process is a one-way street.  The easy way to turn the problem around would be a return to real money instead of electronic digits created at the cost of debt to the people (no surprise then that gold jumped on the news). It’s unlikely that this will happen until it has to happen, but the individual choice of using safe havens is always there. As Ray Dalio said, “If You Don’t Own Gold, You Know Neither History Nor Economics”

We will discuss this article today in more depth on Gold & Silver Standard Insights.  Submit any questions you may have for the discussion to [email protected] and SUBSCRIBE to the YouTube Channel to be notified when the GSS Insights video is live.