Congress Learns AAA ≠ AA+
An Analogous Explanation For The Fitch Ratings Downgrade
Imagine that you live in a relatively normal household of four, with two parents and two children. All is normal but for one difference; instead of the traditional dictatorial rule, each child gets a vote on how their parents make and spend money. To provide color, let’s name the children Rosey and Sam.
Rosey’s main hobbies include taking in stray cats and caring for them until she can find an adopting family. It’s very capital intensive and requires a steady flow of kibbles. Sam, on the other hand, primarily occupies himself with Legos, specializing in building mechanisms that invade his sister’s personal space, mostly by design. This too is very capital intensive because of Lego’s exorbitant pricing scheme. Both immensely enjoy their hobbies and consider them critical for maintaining household prosperity.
The parents, who shall go unnamed, spend most of their time trying to convince their children how they can improve their lives if they would just cast votes to support their initiatives. In fact, lately, more time is spent on this than engaged in gainful enterprise. Their high timer-preference behavior has only accelerated in recent years because Rosey and Sam have progressed to the temperamental teenager phase of life. They are becoming difficult to please!
Sometimes the parents disagree on issues like whether to let Rosey’s stray cats in the house, but most of the time they agree on the big issue: spending. They mutually agree that funding as many household projects as possible is absolutely essential because it keeps the children amenable, for the most part. Campaigning for austerity is as good as a one-way admittance into your nearest dementia care facility. Sam has even used this threat once or twice.
Furthermore, Rosey and Sam have effectively leveraged their suffrage to properly abolish the daily nuisance that is chores. This puts the parents in a particularly tough situation because they were already stretched thin as it is. The dishes have been soaking for a week now. Something must give.
Finally, the family catches a break. The parents experience a moment of narcissistic brilliance and unilaterally agree that there is no limit to how many credit cards they can apply for to hire the help they need. To keep things from getting too out of control, they concur that this policy is only in effect until January 2025, so not to worry.
To their chagrin, the parents are jolted out of their euphoria of ignorance when they open an email from one of the major credit bureaus. It’s a notice they’ve been downgraded! Their first instinct is to type up a nasty response to the credit bureau and take to social media to criticize the decision as “baseless”. But this only succeeds in bringing the inconvenient information to the attention of Rosey and Sam, who then proceed to ask annoying questions like “how are you going to fix this”, demanding an answer before the next election.
The recent decision by ratings agency Fitch to downgrade US sovereign debt from AAA to AA+ is not dissimilar. Their justification includes biting language like “erosion of governance” and “medium-term fiscal challenges unaddressed”. It’s hardly a cheerful read and I suggest consuming the rating action commentary with a side of Dumb and Dumber as a palette cleanser.
However, unlike households, the US enjoys a globally unique privilege that can buy some time, perhaps enough time. That is, currency hegemony and with it, the ability to auction off unusually high levels of debt to fund deficit spending. This privilege does have its limit although no one knows what it is. Hopefully we do not find out as prudent governance takes the front seat before it’s too late. The US Treasury has already issued $1,100,000,000.00 in new debt since the debt ceiling was temporarily abolished in June.
If you would like my more detailed take on what I think this means and where we may be heading, read my newsletter The American Debt Supernova. In summary, things will be fine until suddenly they’re not.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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