Last Friday a report emerged threatening the U.S. and its credit with Moody’s Investor Service. The report claimed that the top credit rating of the United States will be experiencing “downward pressure” in the next few years. This is because the budget deficits are becoming wider while the country’s debt load grows heavier Moody’s states.
Moody’s currently has its Aaa highest credit rating on the U.S. federal government’s debt. The rating today enjoys a stable outlook. Don’t let this fool you into thinking that they approve of the rapidly increasing deficit. Listen to the words of Moody’s analysts Yves Lemay and Sarah Carlson from the Friday report:
The United States’ rating is looking at “downward pressure in the long term, due to meaningful fiscal deterioration. Rising entitlement costs and rising interest rates will cause the U.S.’s fiscal position to further erode over the next decade, absent measures to reduce those costs or to raise additional revenues.”
At first you might think that they are bluffing. The U.S. boasts the most liquid and stable government debt markets in the entire world. Could a credit ratings agency really downgrade the Treasuries?
This would not be the first time it happened. Remember the debt ceiling impasse of August 2011? Both the Republicans and the Democrats refused to compromise to raise the country’s legal debt limit at that time. S&P Global Ratings responded by cutting the United States’ credit rating to AA+. They have never increased the country’s once-coveted rating back to AAA.
The latest threat to the U.S. credit rating comes from the recent two year long budget agreement. This deal will increase federal government spending by nearly $300 billion. According to the nonpartisan Committee for a Responsible Federal Budget, this will mean a deficits’ net increase of $320 billion during the course of the next decade, as the chart below shows:
Adding in interest expenses to this amount raises it to $418 billion in new net deficits. This is not the only debt that will be piled onto the national total though. The committee similarly estimates that the recent tax cut will add around another $1 trillion to the federal deficit over ten years’ time. The Moody’s analysts warned about this as well when they wrote, “The recently agreed tax reform will exacerbate and bring forward those pressures.”
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These fiscal assumptions do not even take into account the devastating entitlements’ shortfall. Both the Social Security and Medicare programs will have used up their cash reserves within years. Before 2035, they will have to drastically cut benefits or add to the federal deficit. This is only more pressure still on much-needed high credit ratings for the U.S. As the ratings decline, the costs of borrowing increase, making the cycle a vicious one indeed. The good news is that you do not need to lie awake at night worrying about the personal effects of this devastating downward financial spiral.
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