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Why did the US credit rating just get dinged?

It might have more to do with the country’s political dysfunction than with its solvency.

A man looking at a monitor scratches his head in front of a large screen displaying a downward trending line graph.
A trader watches a monitor at the Frankfurt Stock Exchange in Germany in March, 2023.
Boris Roessler/Picture Alliance via Getty Images
Keren Landman, MD is a senior reporter covering public health, emerging infectious diseases, the health workforce, and health justice at Vox. Keren is trained as a physician, researcher, and epidemiologist and has served as a disease detective at the US Centers for Disease Control and Prevention.

On August 1, the Fitch Ratings agency downgraded the United States’ long-term credit rating from AAA to AA+ for only the second time in the nation’s history, in what’s generally seen as a signal of concern about the US’s creditworthiness.

Many seemed perplexed by the move. Former Treasury Secretary Lawrence Summers called it “bizarre and inept,” economist and Bloomberg columnist Mohamed El-Erian said it was “strange,” and the White House said in a statement that the move “defies reality.”

In a statement, Fitch cited three reasons for downgrading the US rating: concerns the US economy is going to deteriorate over the next three years; a high national debt; and repeated political standoffs over managing the country’s finances (specifically, brinksmanship over the country’s self-imposed debt limit, the cap on how much to US can borrow to pay its bills).

However, many economists and other financial experts have expressed bewilderment over the motivation for the downgrade. The agency provided little hard data to back up its stated concerns about looming economic collapse, said Stephanie Kelton, a professor of economics and public policy at Stony Brook University. And many experts disagree with Fitch’s pessimistic view of the country’s financial future.

“If you don’t have credible evidence of a long-term inflation problem, then you don’t have reason to be concerned about a long-term debt problem,” said Kelton.

The real reasons for the downgrade, Kelton said, may be less related to the US’s ability to pay its debts, and more related to its willingness to do so. That much was clear from the agency’s repeated mention of its concerns about the country’s “erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades,” specifically with respect to difficulties in raising the debt ceiling, oscillations in tax policy, and increases in government spending.

Whatever stimulated the move, both history and math suggest the changed credit rating will not have meaningful effects on the US economy.

Who is Fitch and why does anyone care what they think?

Fitch is one of the three big independent credit rating agencies whose takes on countries’ creditworthiness really matter on the world stage. The other two are Standard & Poor’s and Moody’s.

These credit rating agencies’ credibility is rooted at least in part in tradition. All three have come under some fire in the past — notably, for exacerbating Europe’s financial crisis between 2008 and 2012 by overrating struggling financial institutions and underrating several European countries. Still, after the US and European governments passed reforms aimed at improving the agencies’ transparency and competitiveness (and after Standard & Poor’s paid an enormous settlement for fraudulent activities contributing to the crisis), their assessments of countries’ creditworthiness remain the financial world’s gold standard.

Big institutions (like pension funds, insurance companies, banks, and the like) rely on these agencies because they don’t keep their money under mattresses or in checking accounts: They generally invest their assets in a variety of ways in the hopes their money will grow as economies grow over the years. And they decide where to invest those assets based on ratings like Fitch’s.

If a country has a high credit rating, an institution can feel secure that investing in companies and industries in that country will probably yield long-term gains, and that the country will eventually make good on the financial promises it makes.

For years, US Treasury bonds have stood fast as one of the safest and most reliable investments where institutions can watch their assets grow. And over most of that time, the US has had a consistently high credit rating across all three agencies (with one notable exception; more on that later). The fact that may be changing now is part of why Fitch’s decision is such a big deal.

Fitch’s reasons for downgrading the US’s credit rating are a little sus

Although Fitch cited recession concerns, high national debt, and political dysfunction as their reasons for the downgrade, Kelton said those reasons don’t really track.

“Judging by their own commentary, they did it because they’re very confused,” she said. The bulk of Fitch’s rationale for the downgrade rested on concerns about the country’s fiscal trajectory, but there isn’t any evidence for that, she said.

A high national debt is also not a legitimate cause for creditworthiness concerns in a country that, as Alan Greenspan said earlier this year, can print money. In this situation, the US’s solvency, and its ability to pay its debts, isn’t really in question.

It’s pretty common for the governments of large, industrial economies to spend more than they take in, said Kelton. If all Fitch needs “to arrive at the conclusion that the government’s fiscal trajectory is unsustainable, then I’m here to challenge that viewpoint,” she said.

What’s perhaps more in question is whether political dysfunction would lead the US to be unwilling to pay what it owes. The US came within days of defaulting on its debt in June, and at least some Republicans seemed willing to allow a default to happen in order to extract various political concessions from the White House. Should that sentiment spread, that could cause serious problems for all the countries and institutions who took on that debt, expecting to be repaid.

But if that’s the agency’s argument, it seems to have muddied the waters a bit by also saying it has concerns about the US’s solvency. There seems to be some subtext that Fitch doesn’t believe US lawmakers can get their act together to fix looming issues like rising Medicare costs and the mass retirement of baby boomers, and that it doesn’t trust Congress to always avoid a default. But Kelton said it’s frustrating that Fitch didn’t say that in plain language.

“If you want to just be explicit and say, ‘We have grave concerns about the direction of US politics, or we think that there’s a chance Congress is turning into a banana republic,’” said Kelton, “fine.”

“But they didn’t do that,” she said.

History repeating is sometimes good

It’s unclear what the downstream effects of this downgrade will be. In the short term, markets can overreact, said Kelton — and indeed, this morning, US and global stock markets fell.

It’s much less clear what the long-term effects will be. Theoretically, a ding to the US’s creditworthiness means a ding to the creditworthiness of the financial institutions that invest heavily in US Treasury bonds. Downstream effects of that could hypothetically include higher interest rates and increased costs to US taxpayers.

But that doesn’t seem likely to happen. Although analysts have concerns that the downgrade would do a bit of damage to the country’s reputation, many still expect the actual impact on confidence and investment in US government-backed securities to be limited, according to reporting from Reuters.

This isn’t the first time the US credit rating has taken a hit — and Fitch isn’t the first agency to ding the country’s creditworthiness. In 2011, after the US government engaged in a debt ceiling standoff, Standard & Poor’s downgraded the US rating from AAA to AA+.

The consequences were underwhelming: “Nothing happened,” said Kelton. In fact, she recalls that the day after the 2011 downgrade, the appetite for US Treasury bonds — a key measure of investor confidence in the American government’s solvency — was up, not down. (That generally seems to have remained true yesterday and today.)

That’s because sophisticated investors understood that the global financial system is built on the US’s ability to follow through on its financial promises, said Kelton. They bet that even if political troubles were putting debt in jeopardy at the time, things would normalize soon. If history is any indication, investors still have confidence in the US.

Other experts seemed to have similar recollections of the event and its economic resonance. “Remember when S&P downgraded America in 2011?” tweeted Nobel Prize-winning economist Paul Krugman. “Neither do I.”

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