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US Debt Is A Bad Bet, Credit Agencies Say, And You’re Going To Pay For It

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Will Kessler Contributor
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Credit agencies are increasingly viewing the U.S.’ sovereign debt as a riskier bet, which could result in the interest being paid on that debt to rise dramatically, with average Americans having to foot the bill.

In an announcement on Nov. 10, top credit agency Moody’s cut the U.S. sovereign debt rating from stable to negative, indicating that soon the U.S. could lose its last “AAA” credit rating from the three major credit agencies. Increasing federal debt and falling investor confidence in the U.S. paying back that debt is fueling the credit rating pessimism, with a lower rating being associated with higher interest rates, forcing taxpayers to use more of their money for the government’s deficit spending, according to experts who spoke to the Daily Caller News Foundation. (RELATED: ‘Slow-Moving Train Wreck’: There’s A Powder Keg Inside The American Economy — And It Might Blow Up)

“As federal government debt surges in the coming years, credit downgrades could become regular and damaging events,” Chris Edwards, the Kilts Family Chair in Fiscal Studies at the Cato Institute, told the DCNF. “Downgrades will mean higher federal borrowing rates and even more government costs imposed on tomorrow’s taxpayers.”

Federal debt is at a current all-time high of more than $33.7 trillion, with $26.7 trillion being held by the public and $7 trillion in intragovernmental holdings, according to the Treasury Department. In fiscal year 2023, when President Joe Biden’s failed student loan forgiveness plan is properly accounted for, the country’s deficit grew to around $2 trillion, compared to $1 trillion the previous year.

“Moody’s decision to change the U.S. outlook is yet another consequence of Congressional Republican extremism and dysfunction,” Karine Jean-Pierre, the White House press secretary, said following Moody’s decision. “Moody’s cites a number of recent actions by Congressional Republicans: repeatedly taking us to the brink of a government shutdown, shutting down Congress for three chaotic weeks because they were unable to unify around a leader and holding the nation’s full faith and credit hostage.”

Biden has made high-spending policies a central tenet of his economic governance, dubbed “Bidenomics,” pushing costly policies that have increased the national debt. Biden signed the American Rescue Plan in March 2021 and the Inflation Reduction Act in August 2022, authorizing $1.9 trillion and $750 billion in new spending, respectively.

“I think the downgrade itself is unlikely to directly cause an issue,” Richard Stern, director of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation, told the DCNF. “However, the downgrades so far have been indicative of broader issues related to the dollar and the impact of the federal government on the economy. So, I view the downgrades as something of the market publicly calling out the government for nefarious acts.”

In order for the federal government to fund its deficit spending, it typically issues Treasury bills, which investors submit bids for at an auction hosted by the Treasury Department, according to Investopedia. Investors send in bids to determine the interest rate on the bond, how much they would like to buy and the discount rate that they are offered.

Following recent low demand for Treasury bills and a deluge of federal debt, the 10-year Treasury yield rate, meaning its interest rate, has skyrocketed, peaking at nearly 5% in October and remaining high at 4.45% as of Nov. 16, according to the Federal Reserve Bank of St. Louis. The last time the rate was at a comparable level was in 2007, near the start of the Global Financial Crisis.

“What a downgrade signifies will continue to tremendously burden American families — if we continue to try to hold down inflation, we’ll see credit card debt swell and taxpayers shell out more and more to pay off federal interest payments as mortgages go further out of reach for most Americans,” Stern told the DCNF. “Or, we’ll go back to rampant inflation to cover the federal deficit, destroying families’ savings and retirement nest eggs, or we’ll simply give in and raise taxes — draining families by yet another method.”

The Treasury yields are also facing upward pressure from the Federal Reserve, which has placed its federal funds rate in a range of 5.25% and 5.50% in an attempt to tame inflation, which peaked at 9.1% in June 2022 and has since remained elevated above the Fed’s 2% target.

Fitch Ratings, another top credit agency, downgraded the U.S.’ long-term credit rating in August, bringing it to “AA+,” projecting fiscal deterioration over the next three years. Fitch pointed to a history of debt standoffs in Congress and the growing debt burden being taken on by the federal government.

Standard & Poor downgraded the U.S.’ credit rating for the first time in the country’s history in 2011 following a debt ceiling fight in Congress. The event fueled a stock market crash on Aug. 8 of that year that has been dubbed Black Monday.

As deficits continue to increase and more Treasury bills are issued, the U.S. could enter a cycle of increasing federal debt interest, crowding out spending on other programs and making Treasury bonds a riskier bet. Alternatively, the federal government could turn to quantitative easing, often critiqued as “printing money,” to fund the debt, where the central bank buys its own bonds, increasing the money supply.

“Federal debt downgrades are a signpost of the damage that tired old politicians in Washington are inflicting on young people across America,” Edwards told the DCNF. “State government policymakers are acutely aware that if they spend and borrow too much, their debt will be downgraded, interest costs will rise, and their taxpayers will bear the burden. Why many federal politicians seem blissfully unaware of this vicious debt cycle is a mystery.”

The White House directed the DCNF to comments previously made about the Moody’s downgrade decision.

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