The United States, considered the world's largest economy, has received a significant blow. Moody's, a prominent credit rating agency, has downgraded America's credit rating from AAA to AA1. This marks the first time Moody's has removed the U.S. from a 'perfect' credit score since 1917. This decision has sent shockwaves through not only the American market but also global investors.
Why the Downgrade?
According to Moody's, America's government debt and interest payments have reached alarming levels over the past decade, exceeding those of similarly rated countries. The agency also stated that U.S. borrowing is projected to increase in the coming years, potentially putting long-term pressure on the nation's economic health.
The agency estimates that by 2035, the total U.S. government debt could reach 134% of its GDP, up from approximately 98% currently. This signifies a substantial increase in the burden of debt on the United States in the future.
Previous Credit Rating Hits
Prior to Moody's, S&P (2011) and Fitch Ratings (2023) had also downgraded the U.S. AAA rating. Now, all three major rating agencies have placed the U.S. below AAA, a clear indication of the weakening economic creditworthiness of the world's largest economy.
Impact on the Average American and Global Markets?
Reports suggest that Moody's action could lead to increased U.S. Treasury yields (interest rates on government bonds). This will directly affect ordinary citizens as interest rates on home loans, car loans, and credit cards may rise. This could create further hardship for Americans already grappling with inflation, tariffs, and economic pressures.
Not only the U.S., but investors worldwide have become cautious following this decision. If U.S. debt is deemed riskier, it could significantly impact global financial markets.
The White House and Political Debate
Moody's decision has intensified the political debate in the U.S. Spokespersons from the Trump administration have accused the Biden administration of poor policies, claiming they are attempting to improve the situation by curbing government spending and waste through the 'Big Beautiful Bill.' Meanwhile, the Biden administration has questioned the rating, stating they are working to correct the failings of the previous administration.
Current State of the U.S. Economy
In the first quarter of 2024, the U.S. economy contracted by 0.3%.
Decreased government spending and increased imports impacted domestic production.
Many companies stockpiled goods due to fears of rising tariffs, leading to an increased trade deficit.
What Lies Ahead?
Following Moody's warning, the biggest challenge facing the U.S. is to control its debt. Failure to do so will impact not only the domestic market but also the global economy. Investors and ordinary citizens must now be more vigilant and cautious in their financial decisions.
