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Last week the prestigious rating agency Fitch reduced the rating of its home country, the United States, from the highest possible AAA to AA+. The US has it now worse rating than, for example, Australia, Denmark, Germany, the Netherlands, Norway, Sweden, Singapore or the European Union. Interestingly, the Czech Republic has a rating of AA- (i.e. two notches worse) with a negative outlook.
In the explanatory report, the agency states that the reason is the expected fiscal decline in the next three years, high and further increasing public debt and, in contrast to others, also “erosion of governance”, whereby the agency encounters regular political deadlocks regarding the debt ceiling, which are always resolved at the last minute .
“Repeated fights over the debt ceiling and their last-minute solutions have undermined confidence in financial management. In addition, the US government lacks a medium-term plan, unlike most of its peers, and budgeting is complex. These factors, combined with economic shocks, tax breaks and new spending, have contributed to the increase in debt over the past decade. In addition, little has been done to address medium-term problems such as the rising cost of social security and the cost of government health programs due to an aging population,” the agency says.
At the same time, he does not expect that anything would change in the pre-election and election year. According to her, the United States will have a budget balance of 6.6% of GDP in 2024 and even 6.9% of GDP in 2025. Interestingly, according to the World Bank, the American GDP is half a trillion crowns, and according to data from June, their debt to GDP is 122.8%. The agency points out that such indebtedness is almost three times higher than that of the rest of the countries rated AAA and more than twice that of those rated AA.
But as the agency itself reminds, the USA is a large, developed and diversified economy with a dynamic business environment. And the dollar is the world’s reserve currency. “This gives the government exceptional flexibility in funding options,” the agency says.
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US Treasury Secretary Janet Yellen complains that the downgrade was “absolutely gratuitous”, because it is said to ignore improvements under Joe Biden and the strength of the US economy, such as low unemployment, innovation, already falling inflation and continued growth. The agency is said to have evaluated based on old data.
According to Yellen, the new rating will not change the fact that US bonds are safe and liquid assets and that the US economy is strong.
Billionaire Warren Buffet from the change in rating he doesn’t care and bought it another $10 billion worth of US government bonds. The only question, according to him, is whether he will next buy ten billion in three- or six-month bonds. This suggests that Wall Street is not worried about the rating change either.
To lower the rating the investor also commented Peter Tchir. When the downgrade happened, he said, “investors don’t buy bonds based on the rating.” He stands by his words. He said he might change his mind if something really changed. “But the difference between AAA and AA+ seems trivial to me. Sure BB and AA are different, but what the heck is the difference between AAA and AA+? I have more important things to take care of,” he said.
According to him, the rating agencies are trying to reduce the amount of debt that is rated AAA, so they downgrade when they can. The only surprise to him is that it took so long for another agency to follow Standard&Poor’s, which downgraded the US back in 2011.
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Tchir has no problem with justification either. He points out that the United States has gone from a country that only went into debt in a crisis to a country that runs a deficit whether there is a crisis or an economic boom. And politicians only pretend very easily that they are worried about the debt. The last time the US budget was approved on time was in 1996. “I’m not an expert, but it doesn’t sound very positive,” judges Tchir, adding that Washington is behaving like ancient Rome, giving “bread and games” for money it doesn’t have.
Constant flirting with exceeding the debt ceiling and subsequent activation of the debt brake also does not appeal to investors as the behavior of a country that should have the highest rating. He doesn’t understand how laws that push spending above that cap can ever be passed.
Trinity Bank chief economist Lukáš Kovanda also commented on the downgrade. He reacts to the words of Warren Buffet: “So the investor is obviously convinced – like many others – that the United States is not threatened with bankruptcy even in the worst dream, because the ‘almighty dollar’ provides them with a super advantage that no other country or economy in the world has.” This super advantage lies in the fact that the dollar, representing the world’s number one reserve currency, allows the US to finally solve even the deepest debt – in popular terms – by printing new money.
The role of the dollar as the world’s number one reserve currency will then ensure that the necessary inflationary costs of such printing will be borne not only by the United States itself, but by the entire world. Buffett actually says between the lines that the US, as the only economy in the world, can borrow as much as it wants, and if the worst happens, the inflationary costs of such printing will be shared with the whole world. That’s the super advantage: The dollar allows Americans to borrow for their needs, but if they don’t tighten it again, it will drag the whole world down.”
Even if American investors do not care about the downgrade, according to Kovanda, it is not a positive idea to downplay it. “After all, the deterioration of the US debt rating by Standard & Poor’s 12 years ago probably contributed at least to a certain extent to the end of the long-term highly favorable attitude of international investors towards the US government and its bonds,” he reminds.
And he commented on the position of the dollar. “Behind the current ‘omnipotence of the dollar’, behind that super advantage, is also the budgetary prudence and reasonableness of the entire long previous generations of politicians in the USA. If the USA and its top politicians do not want to lose their historically acquired privilege of the ‘hardest currency’, they should quickly start building on the previous generations of their political representatives. The deterioration of the rating presented by Fitch is thus much more of a message to politicians. It’s much more of a political message than an economic one.”
When Warren Buffett waves his hand at the deterioration of the US rating, now as in 2011, what is he actually saying – between the lines? That the United States cannot go bankrupt because it benefits from dollar privilege. They can issue so many bonds and create so many dollars that budget holes always… pic.twitter.com/AOVXf2qoJV
— Lukáš Kovanda (@LukasKovanda) August 6, 2023
Indeed, the dollar’s status as the world’s reserve currency may not be eternal. It is speculated that it will fill of the upcoming summit of the BRICS countries in Johannesburg will be the establishment of a new method of trade settlement that would do without the dollar and be based on gold.
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author: Karel Šebesta
#world #pay #USA #Rumors #dollar #debt