US National Debt Gets Burned with a Downgrade!

Photo by Andy Watkins on Unsplash

Just as I published this week’s promised “Deeper Dive” about US debt suddenly becoming a fiery tornado that is spiraling out of control, credit-rating agency Fitch decided to agree with me by downgrading the US credit rating, and markets are not taking the news well so far. Surprise, surprise!

I saw the headline this morning just before I went to proofread the article I began working feverishly on yesterday afternoon. I decided to publish the article this morning as I had written it, without adding in the latest news on the nation’s second credit downgrade in its entire history, because I think it makes the article’s point all the more stunning. It turns out that, as I was burning up my keyboard yesterday to hammer out an article on the dangerous US debt spiral, Fitch was downgrading the nation’s credit rating.

As I expressly stated my own lack of confidence over the ability of the Fed and Treasury to manage the debt inferno they have ignited, Fitch now writes,

The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.

“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025….”

Fitch also highlighted the rising general government deficit.

Of course, Laughable Larry Summers, a former US Treasurer and not-so-noble Nobel Laureate, thinks Fisk was irresponsible to deliver this hit to the debt that is already spiraling badly out of control. They should have cut the government slack and not treated it like they would any other situation of badly inflamed debt.

High-profile economists including former U.S. Treasury Secretary Larry Summers and Allianz Chief Economic Advisor Mohamed El-Erian lambasted the Fitch decision, with Summers calling it “bizarre and inept” and El-Erian “perplexed” by the timing and reasoning. Current Treasury Secretary Janet Yellen described the downgrade as “outdated.”

Flummoxed are they? Because they didn’t see how the debt is wildly raging out of control all of a sudden? Well, they should pay to read here, and they’d see those things for a mere ten bucks a month ; )

The White House, of course, is stomping mad, too:

It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world.

Actually, it finally acknowledges reality, something the White House has been short on. It is that predictable reality that drove me to write my “Deeper Dive” laying out just how bad that reality is rapidly becoming … as I had warned a couple of months ago it was going to become in a shocking manner. That, I predicted, would happen as soon as the debt ceiling was lifted. The lockup of the debt ceiling kept the debt spiral cloaked, even as the spending increased by sucking the United States’ bank account down to zero while debt could not be increased to cover the enormous deficit.

Fitch Ratings downgraded the United States’ long-term foreign currency issuer default rating to AA+ from AAA on Tuesday, pointing to “expected fiscal deterioration over the next three years,” an erosion of governance and a growing general debt burden.

Or as I, perhaps more colorfully, put it:

The US debt spiral is clearly looking out of control, and all of that is assuming the Fed and Treasury manage to keep things under respectable management….

… And to think Phoenix thought it was under a heat dome!

… We have likely hit that point along the parabolic curve where spiraling interest is adding to the debt so quickly that it will be creating its own rise in interest rates in order to attract enough additional buyers just to fund the roaring inferno of interest. In some circles, that’s calling “going critical.”

Like a wildfire, inflation creates its own weather, including its own debt tornados as its searing heat forces the Fed to raise interest rapidly, creating a huge updraft in the cost of debt, but especially when it also forces the Fed to stop soaking up all that excessive government debt as the government’s funder of first resort.

Whooo, Baby! It’s getting hot now! Before you know it, this will be adding up to real money!

Apparently Fitch agrees, though Larry Summers and the Biden White House do not. To help you through the dissembling, the article lays out how bad it really is and why it will be self-feeding at this point. I guess Nobel Laureates have a hard time figuring those things out, but I’m sure you can when it is presented to you in a rather stark and clear picture.

Echoing a quote by John Rubino in that “Deeper Dive,” Mark Mobius says in the news today:

I think from a longer term perspective people are going to begin to think that they’ve got to diversify their holdings, first away from the U.S. and also into equities because that’s a way to protect them from any deterioration of the currency — the U.S. dollar or for that matter any other currency.

Though he still anticipates U.S. stock markets will continue rising alongside global peers, he suggested that stateside allocations within investment portfolios may come down slightly and redirect toward international and emerging markets.

I’m going to keep today’s editorial and headlines short so I can get the critical news about the US credit downgrade out to you quickly this morning, in case you haven’t read it yet, and because you can read all about how badly the US debt is now spiraling out of control in my latest “Deeper Dive,” titled presciently, “Government Debt is Now Creating its Own Weather.” And boy is it hot!

Just as I warned we’d see the results of this chaos soon, yields are reported as rising this morning to a high for the year.

Meanwhile, the jobs news today says, if the Fed keeps going by that metric, it has a lot more work to do to battle the inflation inferno it created back down.