The Downgrading of US Credit Is a Triple Warning to Washington

The Democratic and Republican parties in the United States are fighting again! This time it is because the international rating agency Fitch Ratings downgraded the U.S. credit rating on Aug. 1, lowering the U.S. long-term foreign currency issuer default rating from AAA to AA+. As soon as the news broke, the two parties were at loggerheads, blaming each other and making a lot of noise. The Democratic Party claimed that the credit downgrade “was the result of Republican efforts to manufacture a default crisis,”* while the Republican Party attributed the reason to the Biden administration’s mishandling of economic affairs.

This new round of “passing the buck” between the parties just confirms an important reason for the Fitch Ratings downgrade of the U.S. credit rating. The agency issued a statement saying that over the past 20 years the United States has repeatedly faced political deadlock over the debt ceiling, often resolved only at the last minute, which has weakened people’s confidence in the U.S.’ capacity for financial management. Some analysts see this as the first warning to Washington: Political polarization has led to inadequate governance.

In the U.S. political arena, “fighting for the sake of fighting” has become a distinctive hallmark of the two-party relationship. Let’s talk about the “U.S. debt crisis” not too long ago. A last-minute agreement was reached by the two parties to temporarily suspend the debt ceiling for two years, avoiding a U.S. debt default. However, in the months before this, the two parties engaged in a tug of war, playing a “game of chicken” in order to score as many political points as possible. This scared the market. In May, Fitch Ratings put the U.S. sovereign credit rating on its negative watch list. This formal downgrade can be seen as a further expression of disappointment and dissatisfaction with the ongoing erosion in the governance capacity of the U.S. government. The agency does not expect any substantial fiscal consolidation measures from the U.S. government before the November 2024 elections.

At the same time, the Fitch Ratings statement also pointed out that the U.S. fiscal situation will continue to deteriorate over the next three years and that government debt is high and still increasing. This is seen as the second warning to Washington: America’s “high debt” is raising concerns and the prospect of an economy with expanding debt is worrisome.

According to information from the U.S. Department of the Treasury website, as of July 31, the federal government’s debt was as high as $32.6 trillion, equivalent to nearly $100,000 of debt for every American. It’s reported that U.S. debt has exceeded $32 trillion nine years earlier than had been predicted before the COVID-19 pandemic. Fitch Ratings expects that by 2025 the U.S. government’s debt-to-GDP ratio will have risen to 118.4%. By comparison, the median debt-to-GDP ratio for AAA-rated countries is 39.3% and for AA-rated countries it is 44.7%.

Historically this is not the first time the U.S. credit rating has been downgraded. In 2011 Standard & Poor’s, another rating agency in the West, stripped the U.S. of its AAA rating due to prolonged deadlock between the two parties over government borrowing limits. But this time the situation is different. Comparing the scale of the debt, it’s not difficult to discover that the U.S. federal government’s debt was around $15 trillion then; so it has now doubled. Some analysts have pointed out that the underlying conditions for Fitch Ratings’ decision to downgrade the rating are worse than a decade or so ago. The U.S. debt snowball is getting bigger and bigger and it is feared that one day it will collapse. The Cato Institute, a U.S. think tank, has warned that the increasing size of federal government debt will inhibit private investment and increase the risk of a sudden financial crisis, becoming a “national security” issue for the United States.

The third warning sign concerns the credibility of the United States, which may accelerate the process of “de-dollarization.” Some research has indicated that the Fitch Ratings downgrade of the U.S. credit rating has caused significant volatility in most developed markets, and many countries are already assessing the negative global effects of the decision. The South Korean government stated on Aug. 2 that it would strengthen market supervision in order to prevent the U.S. credit downgrade from causing financial market turmoil.

The U.S. dollar became an international currency based on government credit. Once that credit is eroded, people will naturally seek new alternatives. For some time now, from Latin America to the Middle East, Africa and other important global energy-producing regions — but even in Europe and the Asia Pacific where the U.S. has many allies — more and more countries have “de-dollarized” or are considering it. Recently, Bolivia began to use the yuan in import and export transactions, becoming the latest South American country to routinely use the yuan.

Following the Fitch Ratings downgrade of the U.S. credit rating, a number of U.S. government officials reacted strongly, expressing their unhappiness and anger and claiming that the decision “defies reality.” However, upon closer analysis, the decision is not a surprise; it simply reflects reality. Washington’s politicians should think about fixing America’s economic issues in order to actually restore its reputation, instead of spending time infighting and “passing the buck.”

*Editor’s Note: Although accurately translated, this quoted passage could not be independently verified.

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