The usual language is two out of three. So any investor who had that language and hadn’t gotten around to amending it to exempt Treasuries had already been forced to sell on the second downgrade.
(Doesn't always happen like this, and may not have happened like this last time, but it's not uncommon)
Last time Treasuries were unambiguously a haven asset. That correlation was broken on Trump’s liberation day.
Altogether, I’d be surprised if this downgrade has a material impact on financial markets. It’s much more interesting for the House.
> Fitch Downgrade August 1 2023
> SPY around 455 fell to 433 from August 1 to August 18
> By October 27th SPY bottomed around 410 (-10%)
> From August 1 to October 23, US 10y yield went from 3.9% to 5%
Stocks went down and bond yields went up last time. The Federal Reserve raised the federal funds rate from 5-5.25% to 5.25-5.50% during the same time period.
The simple reality is that US will need to go through a period of pain to correct some of those excesses. It will not be fun for anyone, which is why there is so much effort put forth to kick can down the road.
And the part that really gets me is that congress is discussing cutting taxes, fed is being pressured to lower rates.. as if all those things were not at least a factor in the mess we are in now.
Voters might be unsophisticated, but the bond market is not.
> Bond vigilantes, who can bring fiscally irresponsible politicians to heel by unloading a country’s debt, may rear their head if Congress doesn’t show any appetite to bring the federal deficit under control.
https://usafacts.org/government-spending/
https://finance.yahoo.com/news/bond-vigilantes-killed-trump-...
https://ghpia.com/wp-content/uploads/2024/07/Investment-Insi...
I don't want to give people ideas, but at the same time this is not exactly new to anyone following that set of news. During last EU fiscal crisis, EU came up with a novel approach to handling bond issues. Haircut[1].
[1]https://www.sciencedirect.com/science/article/abs/pii/S10575...
https://www.cbpp.org/research/federal-budget/doge-access-to-...
“For reference, the total net worth of all U.S. households is close to $160 trillion. The rich half (top 50%) own about $156 trillion (or about 98% of it). The poorer half only own about $4 trillion. Breaking down that top half even further, the top 1% (1.3 million families) owns about $49 trillion (or about one-third of the total share) by themselves. And going even further, about half of that $49 trillion is owned by the top 0.1%. That’s only around 136,000 households and includes all of America’s wealthiest people.”
Tax wealth, not work, roughly speaking. With that said, stagnation is inevitable due to demographic dynamics. Historical economic prosperity was because of a demographic dividend that won’t be repeated in our lifetimes.
https://news.ycombinator.com/item?id=43861997 (citations)
It should be illegal to borrow with stock as collateral. This makes tax avoidance really easy for wealthy people.
Nobody needs as much wealth as the top 1%. Limits and incentives need to be put in place to essentially create a luxury tax.
Stock buybacks should be disincentivized. Companies holding so much money in cash sitting on the sidelines (Apple) don’t stimulate the economy.
The US has an embarrassing amount of money, it’s just all manipulated away from the market and the people.
> For the bottom 60% of U.S. households, a "minimal quality of life" is out of reach, according to the group, a research organization focused on improving lower earners' economic well-being.
https://www.cbsnews.com/news/cost-of-living-income-quality-o...
Not only are we already in a bad place with government spending/debt given the new world of high interest rates. We’re just going to blow many trillions of dollars worth of new holes in the budget.
Then throw in the endless tariff stupidity and it’s all just bad, bad, bad.
The only solution is for the Gov to stop spending money it doesn't have. I don't know how you can insinuate that de-industrialization and taxes are a viable strategy without addressing the root of the problem. It would be like telling someone with a gambling problem that spending more time at the casino and less time at work would improve their finances.
Because the government was running a surplus under Clinton and then decided to cut taxes and low and behold there's been a deficit since.
There's little reason for a good chunk of the US, insulated from the true cost of spending, to favor spending cuts.
The real issue with spending cuts is that the public will not accept any reductions to entitlements, the poor won’t accept cuts to welfare programs, and the donor class won’t accept cuts to military spending. This means there’s zero political will to fix the situation.
Challenge accepted :).
The argument for lowering spending and lowering taxes is that the size of the economy and the tax base are inherently tied to tax rates and economic growth. Historically, federal tax receipts have hovered around 17 to 18% of GDP since the end of WWII, regardless of the tax rate[1]. Deep spending cuts paired with high taxes might increase the percentage, but it would be of a smaller economy, shrinking the overall tax base and making the debt ratio worse.
I don't know if that's true and I don't think we'll find out because the Republicans in Congress appear to be going for option C, lower taxes and larger deficits. The Democrats are in disarray and reflexively taking a contrary position, but even if they were in power I don't think this would be much of a priority. I think we get to see how far we can go. Maybe we'll beat Japan's debt to GDP ratio or maybe a failed auction or some debasement. The future has a lot of exciting possibilities.
spending is a good thing. roads, schools, healthcare, research funding - we need these things in order for america and its people to thrive.
our representation just has this awful aversion to increasing taxes on those who can actually afford to bear the increases.
Ultimately, no idea what will happen when debt services consumes all tax revenues. This will come in the mid-2030s at the current rate. I figure that the Fed will just suspend the requirement of Treasuries and debt payments, print like crazy, and the USA will look like Zimbabwe.
It also creates instability generally - in the economy, business, socially, politically - because unreliable US government finances can destroy all those things.
I would have just assumed that if you're another big financial institution you're doing your own research.
Is it that orgs below a certain size need these people to help tell them what's going on?
I would have also assumed anyone who holds an important amount of US treasuries does their own research and doesn't need to listen to any of these agencies?
What actual value do they provide? (esp. in light of the housing crisis proving they weren't providing any value at all?)
https://www.theguardian.com/business/2017/jan/14/moodys-864m...
Moody's has been in this game a long time, I'm sure they're not perfect, but also being wrong once doesn't mean you're always wrong.
Doesn't anyone here think the US recent economic instability merits a reduction in credit rating? We have a massive amount of debt (we borrowed to pay something like $800 billion in interest on our debt last year) and are essentially betting on our rocketship economy to offset our enormous debt in the future. The latest economic turmoil does cast a bit of doubt on that ability to pay off this huge debt later on no? I mean, isn't that a reasonable conclusion, regardless of whether you hate Moody's or think they are stupid?
It’s no secret the USA fiscal path is unsustainable, the Fed has said the same.
Fun fact: those AAA securities paid out. We have obvious endogeneity issues with the bailouts. But the evidence is strong that even absent the bailouts, those senior tranches would pay out.
The problem was that most AAA securities are both highly solvent and high liquid. But these proved solvent but illiquid. That caused issues when their owners tried to dump them. But Moody’s rated solvency, not liquidity.
A significant amount of retail and institutional investment still use these ratings as a guiding indicator.
Not everyone does due diligence. If you have ever worked for a corporation, you know that they love cutting corners. And one corner they'd happily cut is time on due diligence - even if it causes a crash later on. It is not a problem for this quarter.
The interesting aspect to me is that they are not a government department- they make these ratings as part of a profitable business model. It's not like they keep chugging along no matter what.
It just seemed like that during the housing crisis the businesses seen to be putting their "ok" stamp on everything would have been the first to go down.
I don't think it makes sense for every single person or company considering investing in Company XYZ to do their own, separate due diligence on XYZ. The information they each would uncover is the same.
It's a lot more efficient to pay a ratings agency to rate XYZ once. The tricky part is getting the incentives right so that the ratings the ratings agency produces are accurate. (There already is a reputational risk incentive pushing towards doing this the right way, but as we saw in 2008, there are other incentives pushing the other way, and they might often be stronger.)
Additionally, if you are on the other end (the one getting the rating), you pay the credit agencies for a rating so that buyers of debt will buy it. It's basically required that you have a rating if you want to issue debt.
It's a racket in some ways with a ton of bad incentives and inefficiency.
Kind of like a lot of things.
Yes. You can look at default rates by initial and proximate rating and see clear information.
> in light of the housing crisis proving they weren't providing any value at all?
Name me one AAA-rated security that defaulted. They were downgraded. They lost paper value. But to my knowledge, they didn’t default. (Those who held them did well [1].)
[1] https://www.nber.org/digest/aug18/evaluating-role-credit-rat...
Public pension funds are notoriously incompetent at such analysis.
The fact that one party is always behind this financial profligacy, and the US keeps putting it in charge, probably means that the US' debt rating is still much too high.
The problem isn't the debt, the problem is a lack of imagination/ambition in finding good investments for the capital that's being handed to the US. Saying the debt should be cut is saying "We're terrible at business, don't have good ideas, you all need to find smarter and more responsible people to entrust with your capital. We plan to underachieve."
However, if this becomes apparent, it will become increasingly difficult to find buyers for new bond issues.
Heh. You have a point on a technicality, but I can assure you that people, who lend other people money would likely be a lot less technical about it. In other words, the default may be a shorthand for 'immediately unable to borrow more at the previous rate', but I suppose it is not as catchy.
From my basic understanding, this is indeed true. At the cost of rampant inflation, the US can simply print more currency, inflate away historical debts, and not have to default.
If the Moody's credit rating is a measure of the stability of the asset, then a downgrade makes sense. If its to measure the likelihood of a default -- it does seem unlikely the US would simply default.
But maybe there's something I'm missing
Doing it is the end to the dollar backed global financial system.
> “This one-notch downgrade on our 21-notch rating scale 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,” the agency wrote.
It's that moody is grading on a curve.
Self preservation. Have we already forgotten what inflation does to incumbents?
> The Microsoft corporate credit rating is AAA and Aaa by Standard & Poor's Rating Services and Moody's Investors Service Inc., respectively.
It's an interesting aside that the Windows tax in great part was driven by revenue loss resulting from coin clipping.
I guess they’ve that rule.
https://www.spglobal.com/ratings/en/research/articles/240704...
Long term reforms to make education and healthcare outcomes focused, punishing administrative overhead and rewarding performance. Similarly defense could be massively downsized IMO to just expendable drones and submarine based nuclear deterrence, we don't need a 'triad' - one ballistic sub can basically end the world. Replace defense contracts with guaranteed purchase orders and let the private markets figure out how to do hypersonics or missile defense.
We could magically pay it off right now and the US would still look like a credit risk. It's all about trade policy right now, and the general existential risk that we blow it all up. The treasury rate spike in April (likely but inconclusively due to strategic dumping) continues to have everyone spooked, and fiscal restraint, tax policy, austerity, etc... don't speak to that concern at all.
[1] Corrected: service cost of the debt
I think you are very much mistaken: https://fred.stlouisfed.org/series/gfdegdq188S
https://fred.stlouisfed.org/graph/?g=iEiV
Again, if the debtpocalypse didn't happen then it's clearly not happening now. This is simply not about fiscal policy. Period. It's about institutional trust in the government's ability to manage payments.
(No, that's not correct. Borrowing in the 80's was more expensive. Period.)
If I have a $1M mortgage at 6%, and a $1000 credit card debt at 25%, which is harder for me to pay off, assuming I make $100K per year?
This[1] shows in the 80s the total debt to GDP ratio started at 31% and ended at 51%. We are currently at about 122% according to the same chart. I'm not sure what numbers you're referring to, could you provide a source?
In terms of the bonds being paid off that's true, but they were paid off by selling even more bonds to cover new spending and old, i.e. total debt grew even if individual bonds matured.
Edit: i am flabbergasted at how low literacy is about how our government works.
Technically, yes. Practically, it’s a pair of income and expense streams. Slashing social security payouts to pay for some nonsense is tempting.
My guess is we’ll stick it to Gen X.
https://en.wikipedia.org/wiki/Social_Security_(United_States...
>Without legislative changes, trust fund reserves are projected to be depleted in 2033 for the OASI fund.[16] Should depletion occur, incoming payroll tax and other revenue would be sufficient to pay 77 percent of OASI benefits starting in 2035.
[1] We only recently just reached the tail-end of the 1983 reforms' gradual shift in retirement age.
Or...raise the contribution limit which fixes the whole thing easily without having to screw over the people that paid in and just want to get back what they were promised.
Raise the retirement age? Really? All this advancement to make our lives better and more efficient, and we're going to conclude that we all need to to work more?
And meanwhile we can piss away cash by the trillion but when it comes to social security suddenly there's no money to be found anywhere.
They've fooled everyone into believing "the fund will be depleted" in x years. Then put some more money in assholes.
If you have issues with what it is, that's fine. But it still doesn't impact our deficit or ability to pay off debt.
Social security itself does not take in any income whatsoever.
Social security is a debt. Therefore it itself directly affects the US' ability to pay off it's debts.
> It has literally no impact on the deficit or our ability to pay off debt. By statute.
This however is wrong.
As a simple proof: let's just up social security payments by 3000x... social security is still "self-funded" and "separate" but that would be an untenable debt and the US would immediately default on that obligation. The amount and structure of social security debt matters to the US' ability to pay.
Social security is a promise to pay an amount of money in the future and it is backed by the "full faith and credit" of the US government. The bigger it is, the bigger the debt, the hard it is to pay off. It's a big impact.
Just because it's specifically funded and tied to a precise specific tax does not make it immune from debt considerations.
https://www.ssa.gov/cgi-bin/investheld.cgi
Cash money from payroll tax is sitting there collecting interest and being drawn down by Social Security disbursements.
So we pay taxes, that revenue holds a gun to Congress and forces them to buy another aircraft carrier... That's semantics for you.
Sorry. The aircraft carrier thing is bitter sarcasm on my part. But I'm put off by dismissing the funded nature of Social Security as the root cause of the Federal debt.
The root cause is deficit spending.
Eh, that's partly true. The true statement is that social security tax revenue must eventually go to fund social security.
Before it's needed (i.e. while tax revenue exceeds benefits), it has been used to buy US treasuries -- the funds used to do so then appeared for Congress' general use.
You can see the US treasures the social security trust fund is currently holding here: https://www.ssa.gov/OACT/ProgData/investheld.html
The money goes to the trust fund, the trust fund buys treasuries and meets it's outlays using the maturing treasuries.
Or to put it another way, buying special issue treasuries isn't functionally different than Congress directly spending excess money in the trust fund and guaranteeing to pay more back later.
Just with additional steps and a thin veneer of impartiality and financial standards.
> Intragovernmental debt holdings represent federal debt owed by Treasury to federal government accounts—primarily federal trust funds such as those established for Social Security and Medicare—that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities.
> Debt held by the public represents a claim on today’s taxpayers and absorbs resources from today’s economy, meaning that when an investor buys Treasury securities it is not investing that money elsewhere in the economy.
> Intragovernmental debt holdings reflect a claim on taxpayers and the economy in the future. Specifically, when federal government accounts redeem Treasury securities to obtain cash to fund expenditures, Treasury usually borrows from the public to finance these redemptions.
From memory I believe we're at ~100% publicly held debt to GDP and ~122% gross debt to GDP.
No, this is pretty explicit. To rephrase what the GAO said when the Social Security Administration takes in more than it sends out it invests the difference in special Treasury securities (that's the trust fund(s)). The money the Treasury gets is spent on general government operations (education, healthcare, etc). The treasure must pay this money back, with interest.
> But it certainly is not to blame for our inability to balance the budget
When the Treasury pays the principal and interest it needs to either have enough tax dollars (higher tax rates or spending cuts) or issue debt to the public. So yes, it does factor into a balanced budget. It still must be paid back and the taxpayer will foot the bill one way or another, now or in the future.
> which seems easiest to explain with nearly sixty straight years of cutting marginal tax rates while claiming to be fiscally conservative.
This is a gross oversimplification. If you think just one side is the issue you're not going to be able to fix the problem.
And what is the other side, pray tell?
Don't worry, I gave up on this country's ability to fix any problem a long time ago.
The Social Security surplus is pretty much required to purchase US bonds and other guaranteed Federal securities.
But saying that "contributes to the Federal debt" is like saying your 401k contributes to corporate debt.
I am still not convinced that Social Security causes Federal debt the way that a trillion-dollar military budget does.
Source that such reforms add up to this much? What do the reforms look like in concrete terms?
Someone who makes 10 million dollars (or 100 million, or...) a year pays the exact same social security tax as someone who makes $176,100.
You don't even have to raise the cap by very much to fix every foreseeable funding issue Social Security has
Means testing is one of this things that fools people - it sounds good, but in practice is wildly bad at what it’s trying to do, and can be borderline evil.
Beyond the bureaucracy dimension - means testing puts up a barrier, not at the top, but everywhere.
Adding “one more thing” to people who are already struggling can be disproportionally difficult for them to meet, and therefore cause them to miss out on benefits they are completely entitled to.
Additionally, it can create incentives for behavior you would otherwise be completely pathological, such as divorcing your sick spouse because as a couple you don’t qualify for support, but individually they do.
You say this as it's some sort of injustice. But the guy who makes 10 million will collect the same benefit in retirement as the guy who makes $176,100. Or are you proposing that the guy who make $10 MM should pay more, but get their benefit capped? Because if that's what you are proposing, I don't see how that is just or fair. Except maybe following the argument along the lines "screw the rich, they can afford it".
It is absolutely a "fair" and "just" thing for a society to do to itself.
Very few people earn that kind of money as taxable _income_. More people earn that kind of money as unrealized _capital gains_. Social security is paid for with a payroll tax and what amounts to an income tax. Once you're earning several times the cap you stop caring about it. If you earn 5x or 10x the cap then you will probably not be counting on social security, so there's no us-vs-them dynamic likely there. The problem is that to make this make a big different you'll have to hit hard those who earn only 1.5x or 2x the cap, and that's how you'd get an us-vs-them dynamic.
Instead you can increase the retirement age, increase the cap, increase the tax rates, lower the COLAs, etc., and that's what we've seen so far.
Hopefully everyone involved goes to jail, once the government changes and starts charging people who break the law again.
In my humble opinion, this kind of broken promise borders on "the government defrauding the people".
It would be more legitimate to say "SS won't be there for you if you make too much" to those in their teens and 20's just entering the workforce -- but that won't have a major effect on cash outflow needed to satisfy SS obligations for 40-ish years (except for the small fraction of rich unfortunates who get SS because they become unable to work at a young age.)
You might also argue that the level of prying into people's finances implied by "means testing" is a form of illegitimate government overreach. If you believe this, in theory you should, for consistency, also believe that individual income tax ought to be eliminated (which many people consider a radical proposition).
Explicit fuel subsidies are only $3 billion: https://www.eesi.org/papers/view/fact-sheet-proposals-to-red.... (Implicit subsidies are arguably much more, but anything that would make energy more expensive is an economy killer and would tank revenue.) What’s lost to corporate tax havens?
The whole principle of a triad is based on the expectation that an adversary could compromise your retaliatory ability to a high degree so you need to mantain robust options.
In other words, Trump made sure that the US debt situation is unsustainable. I don't know if it was sustainable before Trump (seemed pretty stable to me), but whatever the situation was, Trump made it infinitely worse.
To me this is just another example of Republicans saying the government is broken, when what they really mean is "because we will make it so."
* Dollar "Milkshake" Theory: the dollar (and treasuries) are so in demand that it kind of doesn't matter how far into debt we go, because the point is that treasuries are mostly used for financial collateral, not for earning interest payments. So whenever there is a crisis, there will be a rush to the dollar, not away from it.
* Traditional Fixed Income valuation: that fixed income buyers care about real returns, and will penalize nations that get themselves into situations where they must either default in actuality, by refusing to pay their debts, or by effectively defaulting (in real terms) by inflating their currencies to the point of writing off their debts.
I understand the argument from both perspectives, and I understand that politics can easily lead to defaults that don't technically need to happen. I still have no idea which of these two theories will prove more accurate going forward. I generally consider myself pretty fiscally conservative, so I tend to lean toward traditional theories of fixed income.
White House communications director Steven Cheung reacted to the downgrade via a social media post, singling out Moody's economist, Mark Zandi, for criticism. He called Zandi a political opponent of Trump.
It's always someone else's fault.
> Moody’s said it expected federal deficits to widen to almost 9 per cent of GDP by 2035, up from 6.4 per cent last year, owing to increased interest payments on debt, entitlement spending and “relatively low revenue generation”.
Yes, and this was extremely predictable. Hopefully once the disaster gets a bit more clear more people will see what's happening.
The real crisis is high debt loads in the private sector, not the government. Why? Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts if there is still a US government. The only reason to downgrade is if there is a real risk the US government will collapse and cease to exist for political reasons. There is no fiscal risk.
The deficit hawks don't understand how money works. The real concern is private debts, not government debts. But you never hear about that in the media.
Right, but it isn't like the government controlling the money supply is some sort of get out of jail free card. If it was, why would the government even have debts? US could just pay off all the debt right now.
If the government starts printing money to pay interest on or pay off our $35+ trillion dollar debt, that will cause inflation, which is like a regressive tax. If the government doesn't start printing money, then a greater and greater share of our tax revenues go towards paying the interest. Neither of those outcomes seem particularly good to me.
Debts in the private sector have other downside like economic instability, but it seems to me that private sector lending is responsible for a lot of great economic developments (of course including our little VC funded corner of the world).
Anon84•7h ago