US government kisses its last triple-A credit rating goodbye. Downgrade to “junk” would have been more appropriate?
By Wolf Richter for WOLF STREET.
The US government lost its last remaining triple-A credit rating late Friday, as Moody’s finally, after more than a decade of dithering, downgraded the government to Aa1, one notch below the top credit rating of Aaa.
The downgrade “reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” Moody’s said in the announcement.
And it added:
“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
And it warned:
“Persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.”
It expects the federal deficits to reach “nearly 9% of GDP by 2035, up from 6.4% in 2024.”
Moody’s was the last of the three major US credit ratings agencies to cut the US government credit rating, years behind:
- In 2011, S&P Global Ratings downgraded the US one notch to AA+
- In 2023, Fitch Ratings downgraded the US one notch to AA+.
While reading Moody’s “ratings rationale,” one gets the impression that the US government should have been cut to a “junk” credit rating, maybe to a mid-level junk rating such as Ba3, to allow for some wriggle room either way (here is my cheat sheet for bond credit ratings by ratings agency
Not that these downgrades make a lot – or any – difference. For example. Moody’s rates Japan A1, that’s four notches below triple-A and three notches below the new and improved US credit rating, and so what. Nothing happened.
The problem arises when inflation comes along and the bond market gets spooked, and if the central bank tries to bail out the borrower, such as the Fed trying to bail out the US government, with bond purchases (QE) and interest-rate repression, while inflation is taking off, it could cause inflation to go completely out of control and spiral into the triple digits, such as it has done in Argentina and many other countries, by which time their own currency becomes kind of useless. Everyone knows this. So this is likely not going to be experimented with in the US.
Upon the news, the 10-year Treasury yield spiked in late trading all the way to high heaven, by something like, wait for it, 4 basis points, to a whopping 4.48%, about halfway back where it had been … yesterday.
It’s not until the bond market scares the bejesus out of Congress and the Administration that they will do anything serious about reducing the deficits.
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Thanks for this report WR.
These ratings for US Govt debts has no bearing as US Govt owns the printing press and can never default. Please correct me if I am wrong..
Correct, it can never default on the debt. But as I said in my third-to-last paragraph:
“The problem arises when inflation comes along and the bond market gets spooked, and if the central bank tries to bail out the borrower, such as the Fed trying to bail out the US government, with bond purchases (QE) and interest-rate repression, while inflation is taking off, it could cause inflation to go completely out of control and spiral into the triple digits, such as it has done in Argentina and many other countries, by which time the own currency becomes kind of useless. Everyone knows this. So this is likely not going to be experimented with in the US.“
Well, then what tools will remain at that point? Managing this is like planting a tree — the best time for that is 10 years ago. The next best time is now. Based on the current budget proposal, “now” is not on the table.
The only real tool is the bond market. That’s what it’s for. If it finally gets really pissed off and demands much higher yields to buy the debt, while inflation is surging, and the Fed’s hands are tied to avoid descending into much worse inflation, that will scare the bejesus out of Congress, maybe for long enough to do something about the deficit.
They shouldn’t even be thinking about thinking about additional tax cuts at this stage.
The problem isn’t insurmountable. They don’t even need to balance the budget. All they need to do is get the deficit to 2% of GDP, and that will whittle down the burden of the debt over the years via modest inflation and economic growth. But you can’t be talking about tax cuts to get there. That’s just insane.
Typo : “time the own currency”
Maybe “the” should be “their” ? As in “time their own currency.” ?
The stock market responded to the down grade by going up, and oddly, gold went down. But then the Wall Street Casino follows it’s own peculiar logic.
I expect that the Federal Reserve will look to protect the cartel of private banks that own it. And that Congress will pass a broad general tax and austere cuts onto the ordinary public, while handing out generous tax cuts to the Super Duper Rich.
Interesting times.
wolf, if i’m doing my math correctly, 2% of gdp for the u.s. would be less than $600 billion. that would be about a 75% decrease in the current deficit. not doing tax cuts wouldn’t be enough to achieve that. they’d need a combination of $1.6 trillion in tax *increases* and spending cuts.
Franz G
I didn’t say that at all.
where am I misreading then? you said “get the deficit down to 2% of gdp.” gdp is around $30 trillion. so 2% of that would be a deficit of $600 billion.
the current deficit is $2 trillion or more.
France G
You’re sticking BS into my mouth, one of the seven deadly sins of commenting here.
This is all I said, the rest you fabricated:
“ They don’t even need to balance the budget. All they need to do is get the deficit to 2% of GDP, and that will whittle down the burden of the debt over the years via modest inflation and economic growth. But you can’t be talking about tax cuts to get there. That’s just insane.”
I didn’t say a single word of HOW they get the deficit to 2%. That’s YOUR BS fabrication. What I said say is “you can’t be talking about tax cuts to get there.” Read this sentence repeatedly until you understand it.
“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a 400 baseball hitter. But now I would like to come back as the bond market. Why? Because nobody fu@ks with the bond market”
James Carville, 1991’ish
Controlled Currency Devaluation – it’s coming.
Correct me if I’m wrong but it was Moody’s who completely ignored the MBS market until 2008 happened…
You are right! I just started as a capital markets commentary writer for the WSJ in 2007 and met the head of BofA’s structured products group for a backgrounder. I asked him what his biggest fear was. He said, “Somebody at Moody’s wakes up tomorrow and says, ‘Shit, we got the math wrong!'”
By this logic Zimbabwe can’t default, because it owns a press.
Problem: it costs money to print money. Paper and ink have to be purchased with money and the suppliers reach a point where they don’t want yr product. This accounts for the huge denomination notes issued near the end. Before the euro, Italy had a 500 K lira note. But all real estate and even cars were priced in US$.
You can’t default on internal debt as long as the govt has will and POWER to
enforce its writ re currency. This evaporates slowly, then quickly.
In all Moscow restaurants the prices are in US$, but you can’t pay in US $.
You can only pay in roubles, which must be exchanged at an artificial rate.
Unless you are offered a private street deal to ‘exchange money’
Not recommended. It’s hostage season.
I’ll just add here: Zimbabwe never defaulted on debt issued in its own currency. But it defaulted on foreign-currency debt. If a country destroys its own currency (as you point out), then it can no longer borrow in its own currency because no one wants to buy that debt or hold that debt, or they demand gigantic yields, and so the country borrows in foreign currency, and then defaults on the foreign currency that it cannot print. That’s what Zimbabwe did.
Argentina has defaulted on its foreign-currency debt something like 8 times or whatever. It’s got that system down pat. They work with Wall Street to issue these dollar bonds, euro bonds, and yen bonds and rip off investors in developing-market bond-funds. They’re all gangsters. No one should ever lend any money to Argentina.
I had an incredible experience in Zim years back where I went to make a call at a pay phone.
There was a huge bucket of Zim dollars (large coins) next to the phone with an attendant who shoveled them in as fast as possible to keep up with the ever rising toll. Literal demonstration of inflation.
I read yesterday that the RC bill the House is looking at will create a $5T deficit over the next two years. $2T this year and then $3T for FY 2026. I guess DOGE was meaningless or at least it didn’t get Congresses attention enough to enact meaningful cuts. Maybe it’s a good thing that the Big Beautiful Bill doesn’t pass.
Yikes!
Even if it doesn’t pass, what we will get sure as hell won’t make a dent in deficit reduction. Maybe it will make a promise to reduce the deficit in future years, like EVERY budget has for the last 10+ years.
Well, maybe the issue isn’t with the expense side but more with the income side. Like, if you want people to enjoy the benefits of a stable prosperous economy, claw back some of the profits the monopolists and robber barons are accumulating.
Geez, naw, just kidding! Like our prez.
Tax the rich. And I mean the oligarchs.
Wolf, on the comment above, I heard a program (starts with Freak…)say that even if we took all the US billionaire’s wealth we couldn’t pay off the US debt. Is this true?
Only a braindead idiot would say “pay off the US debt.” That is just idiotic. It’s that kind of stupid-ass bullshit that is being used to pollute brains and the toxify discussions about tax hikes on the really rich (actually doing away with tax loopholes for them, such as the earned interest deduction, in-kind charitable contributions, etc.).
What the US needs to do is reduce the annual “deficit” (not the debt) to levels where modest inflation and economy growth outruns the deficit and over the years lowers the burden of the debt.
You could not be more incorrect. Spending has exploded 40% since 2019. 40%!!! Have you increased your spending by this amount since 2019? Have you seen a 40% improvement in government services since 2019? This has to change or our kids will have a permanently lower standard of living.
Both parties are obviously at fault here, but the problem is VERY clearly spending and not revenue.
Doesn’t matter. If Congress can cut taxes and get away with it, they will. Raise taxes automatically across the board to meet spending. If Congress wants to cut taxes, it will force them to cut spending. This has been proven over and over. The country has been taken over by irresponsible people electing irresponsible politicians.
Well, only Congress can actually cut spending. DOGE could theoretically find some waste, but when it stops congressionally approved spending, that’s actually illegal, and technically a default on US debt, as was pointed out in the wsj op ed penned by the 5 former Treasurers. DOGE was simply a distraction for the real budget changes, which were actually massive increases in deficit spending. But there was a guy with a chainsaw or something so blah, blah, blah, must be reducing spending. Nope.
For decades, we’ve had the best Congress that money can buy. They will continue to buy votes with these schemes until the bond market scares the bejesus out of them. Nothing will change until then.
So if uber high / spiking bond prices scares the BeJesus out of Congress. What happens to the rest of us? Sudden Cardiac Arrest? Also, is it safe to say our debt crisis isn’t, as the saying goes, 30 years down the road like nuclear fusion?
I’m not sure a majority in Congress are intelligent enough to be scared.
“Can’t fix stupid!”
Forest Gump
I don’t think Congress will be scared by spiking bond PRICES. You probably meant to say YIELDS (accompanied by FALLING bond prices).
as long as foreigners are tripping over themselves to buy u.s. debt at 4.5%, the status quo can continue.
Right on Wolf.
The Bond Vigilantes need to come out of hiding. Are they hiding in Argentina?
At some point the Hemingway quote will become reality. “How did you become bankrupt? Gradually, then suddenly”
That is precisely what CANNOT happen with a country that issued debt in its own currency (Argentina never defaulted on its peso debt, it defaulted on its foreign currency debt). What can happen to the US though is inflation and ultimately currency destruction.
Unfortunately you are right. Watch the yield curve, when the 20 Year and 30 Year Treasuries sell off this will be the head slap to Congress…
DOGE is not about efficiency. It’s about shutting down what the administration and tech bros don’t like.
Huh?! DOGE is run by a tech bro, installed and endorsed by the current administration.
(Well, I hear Elon is stepping out of his role, but still)
the problem is really that only 10-15% of federal spending is actually discretionary. so unless you’re willing to cut social security or medicare benefits which have already been earned, to make reductions to medicaid, cut the defense budget, or default on interest payments on the debt, you won’t make any meaningful reductions.
All of that was a joke to begin with. This is what happens when irresponsible children play with matches.
It looks to me like the stock market is back to kicking butt. Who’s worried? AS IF the president and congress ever want any type of deficit reduction. Re-election is more important.
if you listened to the mainstream media, you’d think that the average american prioritizes the stock market above all else. but it doesn’t. if it did, 70% of people wouldn’t have said the economy sucked in october 2024 right before the election. it’s more that the rich care about the stock market, and the rich control the media.
Drunken Congress(es); drunken Administration(s); drunken sailors(voters). And we’re all seeing pink elephants.
And the withdrawal: have you ever seen delirium tremens? A friend’s alcoholic dad had that. Scary. He handed a screwdriver (a tool, not an actual cocktail) to a person who wasn’t there, dropped it into space.
According to the Wharton Model a VAT tax might be a solution. Problem is, if you give Washington a way out they will take it and keep on spending us into oblivion.
Trump believes in Bitcoin. Is this going to be our new currency? Perhaps a gold backed dollar would be a better choice.
Trump doesn’t believe in Bitcoin (and surely doesn’t understand much about it). He believes his family can make piles of money via crypto. Big difference.
bitcoin is a scam. it was supposed to be a currency that was counter to general risks in assets.
look at a chart for the past few years. it literally follow the mag7. it’s a tech stock, not a currency.
Bitcoin is an equity share in everybody’s belief/confidence in it, sort of a circular thing, which may sound like a regular currency, except it is extremely less efficient for its creation, payments, etc. Other kinds of crypto are far more tamper-prone, on top of that. Everybody can create “private money” already, it’s called writing a check.
right, that’s why it’s functioning like a tech stock. people are buying it, and tech stocks are ridiculous valuations, because they think they can sell to someone else for a higher price later.
that’s all it is.
‘Everybody can create “private money” already, it’s called writing a check.’
Unless the check can be exchanged for gov issued money, this is called forgery.
Gold (and other metals, including lead) are indestructible. Bitcoin is not. Diamonds are not, for that matter.
According to the international economics college class which I took over 50 years ago, it was France that came to the realization that it could not fund its central government operations based on income taxes alone. Rates would have to be set too high and massive tax evasion would result. It first experimented with something called a turnover tax, levied at each stage of production and/or distribution and then switched to the Value Added Tax levied on the final sale of a good or service. Eventually, all of the major industrial countries imposed a similar tax, except for the US, whose House and Senate members are still haunted by the defeat of Congressman Al Ullman back in 1980 after he proposed a similar tax in the US, when he was head of the House Ways and Means Committee.
Right on! Gold backed dollars are the way to sanity.
For any of you bitcoin aficionados out there, you may want to read the May 5th article in Texas Monthly on bitcoin mining. Texas is the bitcoin mining capital of the USA and regular citizens are getting hosed.
The amount of power and water required for this BS is unreal. The amount of noise is driving people to sell their homes. Ted Cruz is making a fortune.
More noise. It’s a joke, sadly. We need genuine, meaningful change. The politicians need to stop talking the talk and start walking the walk. They need to raise taxes on the super rich, as well as the ridiculously overvalued corporations that charge consumers too much for their goods and services and make more money than they know what to do with so their stock prices stay up in bubble land. Corporate insiders print their own winning mega-millions lottery tickets whenever they want. The working men and women get tossed a few breadcrumbs.
Here here!
I agree, sorta. But bro, you did actually see the last two guys that were president, no?
I mean, come on. That’s such a clown show up there.
…. In this corner, a blathering moron from the Georgia hills, squaring off against a guy who pulls fire alarms like he’s in middle school.
100%
You can tax the “rich” all you want, and it will not be enough to satisfy the expanding welfare state and other pork that Congress is cooking. We have a massive, massive spending problem. It must be reined in. And people who are truly wealthy will simply not pay confiscatory rates, nor should they.
Every state with a massive welfare system taxes the absolute crap out of the middle class with VAT and confiscatory income taxes because middle class people have easily measured and verifiable income that cannot be massaged, whereas the very wealthy have the ability to take income in many forms and locations.
Remember, our original income tax applied to today’s equivalent of roughly the top 0.3%. Look how that has turned out, massive payroll taxes for the working class.
this is correct. one can argue that the tax system should be more equitable, but the idea you can pay for everything just by taxing the top 1% is a fantasy.
one can compare the taxes an average family of 4 making 80k in finland versus the taxes an average family of 4 making $80k in the united states pays. it’s not even close. that’s the reason that americans appear to have higher standards of living in terms of consumption than the social democracies of western europe. because the taxes they would otherwise have to pay to sustain everything is instead borrowed.
the rest of the world can’t borrow what the u.s. can at the moment.
There is basically 0 political incentive for any administration to balance the budget. It will either cause a lot of pain in the form of much higher taxes or deep deep deep cuts to everything.
But while this will affect the market somewhat. The stock market didn’t seem to care that much in the futures.
The stock market is very overvalued, it will go down again at some point.
Source? Trust me bro.
The stock market is probably where it should be. Pe ratio is like 28 but much lower when looking at 2026 earnings forecasts
eric86, those forecasts are always reduced down later on, so that they can “beat” earnings. but that “beaten” figure is still lower than the original forward projection justifying the price today. it’s a stupid game. don’t fall for it.
Wolf, Question for you …… , in the Current Quantitative Tightening by the Federal Reserve…., are they only letting these Securities Run Off and not Selling them ?
They’re not selling any securities right now. But they once again started talking about selling MBS. They talked about it a couple of years ago, but then in early 2023, three banks imploded that held MBS, and they stopped talking about it. Now they’re talking about it again — I’ve already heard it in two speeches. We should see a mention in the minutes if they’re serious about doing this, and I will of course instantly make a big deal out of it.
Selling MBS. Damn, I’d like to see that.
Just wondering, what has got the Fed talking about selling MBS again?
They’d like to decrease or even reverse treasury runoff while still running QT overall. That means they have to let go of their non-treasury assets at a faster rate.
They really don’t like them on their balance sheet and want to get rid of them. And pass-through principal payments are now just a trickle and will likely stay that way. So the MBS will stick on the balance sheet way too long.
Nobody really cares about the ratings of credit agencies. The US dollar is backed by the full faith and credit of our nuclear arsenal and the largest economic power on the planet.
I think that this isn’t true. It’s almost arrogant to think you’re so powerful that people won’t invest in you. A lot of pension funds have guidelines that prevent them from holding bonds for companies or countries that do not have specific credit ratings. I think the instant spike in the bond rates right after this was announced suggest that the bond ratings are important
Did you miss this from Wolf in his blog? Did you miss the collapse in 2011 and 2023?
Moody’s was the last of the three major US credit ratings agencies to cut the US government credit rating, years behind:
In 2011, S&P Global Ratings downgraded the US one notch to AA+
In 2023, Fitch Ratings downgraded the US one notch to AA+.
Canadaguy, the spike in the 10 year Treasury was unimportant. RTGDFA, especially the next to the last paragraph. Note that Mr. Richter is being sarcastic.
8 trillion of our debt on the pointless ‘war on terror.” Nukes don’t really matter when everyone has them. The world, or more specifically is in danger of MAED(mutually assured economic destruction). When you spend on your military more than next 10 highest combined and can’t defeat the Taliban you aren’t exactly winning.
Military spending serves two purposes: one is a jobs program for young men with no other prospects, the other is a re-election plan for congress critters in strategically chosen locations. Actual effectiveness and need is irrelevant.
i would argue that state and local employment is very similar. 50 jobs that are actually needed versus 100 that are there, much like the military.
Not so sure about what is “actually needed” in terms of human employment, if we explore the alternatives.
“Every society is three meals away from chaos.” — V.I. Lenin
phleep, if government jobs are just to keep certain otherwise unemployable people busy and fed, there are better and cheaper ways to do it.
Given how they handled the wars on alcohol and later drugs, terrorism will soon be legal such that you can buy bombs and drones on any street corner…so long as the clown school administration gets their tax payment. On sale here—>Beer & Ammo! Driver Licenses—>The Short Form Available.
“Nobody really cares about the ratings of credit agencies.”
Maybe some folks remember how the ratings agencies lied their collective asses off when they called toxic MBS Triple AAA Platinum Plus when they knew they were poison.
…and no one went to jail. So why care what they say now?
Loss of one notch of a credit rating can trigger credit events in financing that are very real: can lead a company or country straight into a credit death spiral.
The US has nothing to worry about until another viable virtually risk free investment exists. The time to get our fiscal house in order was decades ago but the combination of demographics (aging population, declining birth rates) and significant tax cuts it only gets worse from here. Obviously with the wealth we have here plenty of solid solutions exist but that would presume our elected representatives actually represent. It isn’t like we don’t have other countries to look at to see where this all goes.
You talked about everything contributing to the deficit except the one factor that is THE most important.
Federal spending is exploding. If we cut spending to 2019 levels, we would have a massive surplus. If we required ACA Medicaid expansion to have states pay 50%, like the rest of Medicaid, we would eliminate a third of the ongoing deficit, and treat the very poor the same as those above the poverty line, which is the moral thing to do.
it’s not a risk free investment. risk free to me means not only are you guaranteed to get your investment back, but that the value of the currency won’t be so debased at the time you get it back that you’ve effectively lost a lot.
i don’t consider the 30 year treasury at 4.9% to be risk free, because I am not at all confident that there won’t be more than that in aggregate inflation over that time.
The US has everything to worry about. Dropping these huge deficits will cause major economic pain; deep recession or worse. Not to mention the social ramifications.
On the otherhand letting it continue will likley result in a worse reset/situation. ‘
The muliplier effect of 2T deficit is likley 5-6T of actual spending power in the economy, likely more.
Meanwhile, the rest of the world is growing impatient with our abuse of their dollar.
Economically, the U.S. is in better shape than the rest of the world. It is the one place where capitalism always gets a smile and a nod. Despite the advances of the left, they never yank out the carpet from underneath the business class — only circumscribe it somewhat.
it’s in better shape because it has the reserve currency. period. that means that it can borrow and spend ungodly amounts of money to plant to seeds for the business growth you describe.
when that ends, you’ll see what condition the u.s. economy is really in.
The Laffer Curve, supply-side economics, has already been denigrated. The deficits must be cut. Only interest is “untouchable”.
Won’t make a lick of difference to our elected officials, reguardless of which side of the aisle they sit.
To actually balance the budget you’d have to cut from everything and tax from everyone. Raising taxes on the “rich” won’t do jack shit. Cutting a 40 million contract won’t do shit.
SS needs serious reform as does the proxy war and national building department (“defense”) but good luck getting the losers in Washington to do any of that
I didn’t mean that as a reply to you lol
Apparently: “Several countries hold a triple-A (AAA) credit rating, indicating the highest level of creditworthiness. As of 2024, these include Australia, Canada, Denmark, Germany, Luxembourg, Netherlands, Switzerland, Norway, Singapore, and Sweden.”
Just sayin’.
Good to drop the rating on a Friday so it mostly
goes unnoticed by Joe Sixpack.
10yr Bond Yields –
4.484% USA
4.511% Australia
3.197% Canada
2.486% Denmark
2.586% Germany
2.803% Netherlands
0.298% Switzerland
4.071% Norway
2.512% Singapore
2.341% Sweden
The point being that countries many Americans may regard as being socialist or at least left-leaning are considered to be a better risk than the USA, because of their good economic management.
You’re telling half of the story. They have lower 10 year bond yields partly because they are viewed as a better credit risk.
But those countries also all have short term rates far below US rates because their central banks view the possibility of lower long term growth relative to the US, and the market agrees.
So much of what you are pointing out is a result of interest rate suppression in those countries by their central banks. Hardly a vote of confidence in the economy or government management of those countries. If they had red hot economic performance, they would have rates more like those in the US.
I’d agree, good summary.
Since the horse has left the barn debt wise here in USA, I wonder how it all plays out. I suppose Wolf’s inflation scenario.
Income taxes aren’t painful in America imho… yet. Prop taxes, health insurance, retirement, college costs, etc tough
and ever increasing. But we get off pretty easy for now tax wise. I’m not sure your average citizen is ready to pony up
after years of declining real rates.
Maybe they can whack away at Medicare et al. We do pay 2-3x more than the other countries listed.
Then you have SSI. Handing older (many helpless) folks 80 cents on the dollar of benefits hard to stomach. Maybe lift cap on SSI taxes , etc
Then you have defense for $1T. And net interest for $1T. That’s the vast majority of the budget.
Quite the riddle. Crazy as there are many logical levers to pull and feels like we are riding off a cliff.
ssi is outrageous as implemented. 70 year olds can be granted refugees status here, and they immediately are eligible for ssi.
even if you accept that the taxpayer should be subsidizing the poor, that shouldn’t extend to poor foreigners.
Emerging market debt price has been trending up, 2014 year looks to be the recent high-water mark. Liquidity is flowing away from the core debt to the periphery. I am not even sure what the says about the big debt picture. Usually when we catch a cold they end up in the hospital. Maybe a new LTCM is making a risky bet or people are just chasing yield or world order has changed. I have Brazil defaulting before this over. CDS on Brazil 10 year, place your bets!
If tariffs hang around long enough to fix the trade deficit, we’ll find out if the federal deficit is linked somehow!
One possibility is that if the trade deficit is fixed it should cause import substitution in the process. The additional production of import substitutes, will cause a change in employment will in turn pressure inflation higher. That in turn causing the Federal Reserve to empower the bond market to cause the voters and Congress to be in an anti-inflation, deficit fighting mood.
The economy seems to be a Rube-Goldberg machine by default! Everything is linked to everything and back around again in a myriad of ways!
If the U.S. government really wants to get serious about dealing with the deficit, then they should stop blaming it all on entitlement spending and begin focusing on something other than repeating rounds of deep cuts to tax revenues.
But I suppose such a narrative would not sit very well with their affluent handlers and campaign sponsors. So instead of solving the problem, let’s just continue to blame immigrants and poor people.
it’s not just the rich who have received these tax cuts, but the middle class and poor as well. the poor have tons of “refundable” credits, which means they receive back more than the pay. the middle class have deductions and child tax credits that mean they pay very little in federal income taxes. they do pay social security and medicare, however.
*everyone* will have to pay more if there will be any hope of reducing the deficit.
And *everyone* seems to expect more from gov than they pay for. And they vote lying hucksters into office, accordingly. Anybody else trying to be elected will be laughed off the stage. We are in a hallucination.
correct. the rich don’t feel like they should have to pay a disproportionate share of infrastructure, and the middle class and poor don’t feel like they should have to pay anything.
hence why we’re in the situation we are.
Franz – always willing to soldier, yes?
may we all find a better day.
Japan runs a national debt of 3 times to gdp. Its ten year trades at 1.47%.
Until someone can reasonably explain how Japan can get away with 3 times debt to gdp while carrying a 1.47% interest on its ten year, all logic is meaningless with consequences to the USA national debt.
Higher authorities bake that cake evidently.
They didn’t get away with it. The currency collapsed. And now they have inflation — more than in the US — and they’re doing QT to do damage control.
therein lies the problem with human nature. we believe that if we get away with things for a long time, that means we’ll get away with it forever.
you see that from people who live beyond their means, to business owners who keep raising prices or reducing quality, to people who drive drunk and don’t get into an accident or get arrested, and so on and so forth.
Wolf, I have read that the downgrade by Moody’s to AA ( the last of the major ratings agencies that rated the U.S. Government at AAA) means there will be forced selling by some investors that are required to only hold AAA rated securities.
Have you researched that at all Wolf?
If true, this appears to be a market impacting news item that doesn’t seem to be getting much notice.
That requirement may apply particularly to foreign investors.
Still, given the enormous financing requirements of the U.S., this could put more upward pressure on longer term yields and the ongoing “bearish steepener”
There are some money market funds that require that the short-term commercial paper they hold is triple-A rated. But commercial paper is issued by companies. I don’t think there is any requirement by any fund to hold only triple-A rated government securities — and if there is a fund out there like that, it’s minuscule and has no overall impact. There are requirements to hold only investment-grade securities, but AA+ is still near the top of investment grade. The idea that there is going to forced selling due to the downgrade from AAA to AA+ is nonsense.
Ok thanks
Wolf,
You often write the US “can never default” on its debt because it owns the printing presses. I get why it should never be *forced* to default but aren’t there many ways the us can default either intentionally or as a bi-product of government disfunction? I am not saying it wouldn’t be incredibly stupid, but it seems Congress plays chicken with defaulting on the debt on a routine basis and it is unclear to me if the Federal Reserve has a mandate to bail out Congressional recklessness?
Anyone can dream up any scenario and write a fiction book about it. What if the earth is flat? What if the sun doesn’t rise tomorrow? What should be do then?
If the sun doesn’t rise tomorrow, short the solar stocks.
The bond market CANT scare the bejezus out of CONgress: they own stocks!
POTUS doesn’t understand “interest rates” in part because he uses “legal default” (aka bankruptcy) as a viable and “successful” business strategy.
I am glad Wolf cites “triple digit inflation,” since this is the definition of hyperinflation (not 10-20%… 100%).
The “solution” per Professor Hanke is his “golden growth rate” of money supply. Maybe about 6%/yr. It’s NOT 100%.
Howdy Youngins Can t believe what I am reading. Tax folks more instead of Govern ment spending less????? Feels really good to be old.
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The charges on debt are related to a cumulative figure; and since the multiplier effects of debt expansion on income, the ingredient from which the charges must inevitably be paid, is a non-cumulative figure, it would seem that the time will inevitably arrive when further debt expansion is no longer a practical or possible expedient, either to provide full employment or to keep debt charges with tolerable limits.
I think it is also a little silly for anyone to truly freak out over this. This just tells us what we already knew, what the stock market knew, what the bond market knew. Most of not all has been priced in.
Long term we need a viable solution though
from Moody’s”. As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending and relatively low revenue generation.” Bessent loves to drop Stein’s Law: If something cannot go on forever, it will stop. usually applied to things like trade deficits but we all know he is aware of the federal deficit. The news flows has been great for keeping “risk on” at every inflection point on the charts to keep the rally intact since April 9, equities closed at an inflection point on my charts yesterday and this nugget from Moody’s may of rung the bell. The Average Bear market rally is 40 some days. Bitcoin has been a good canary in the coal mine for Risk ON, if Sunday night it dips below 100K Risk off is coming.
They overspent $31T over the last 25 years. They overspent $5.6T over the first 211 years. The political class are looting the treasury. We need to vote them all out and fix this or become the Weimar Republic.
It always amuses me to see the naive and gullible demand that the voters boot their esteemed representatives. The US has the lowest voter participation rate of any “democracy” and no wonder. The voters know they have been hand picked to vote for their team!
Actually, it has to do with the action of their central banks, their long bond is still correlated to their over night rate. Swiss has a lowered its overnight rate to keep its currency from spiking. Each central bank has their own reasons. I would buy all of those bonds listed to diversify out of the $USD, to be hedge in other fiat against our fiat. Afraid Gold may correct. Robert Rubin when he was treasury secretary shared his fear the Fed could lose control of the long bonds with their Fed funds rate, it would march to its own drummer That appears to have happen the last time the Fed lowered rates. It’s getting exciting to watch. Adrenalin will be pumping soon, the $vix is a tight rubber band waiting to snap higher! I don’t envy the short $vix crowd. The yen carry trade has been quiet lately. The Yen is at an inflection point, not sure how it’s going to break. Up or down? Will find out in the next couple of days or maybe weeks.