DANIEL VAUGHAN: Fitch Ratings Downgrade of US should be a Wake-Up Call

 August 4, 2023

To listen to the White House shout and scramble about it, you'd think the decision of Fitch Ratings to downgrade the United States from AAA to AA+ would be all about Republicans. The White House called it a "Trump downgrade," and Democrats have blamed MAGA Republicans. It's a full-on panic at 1600 Pennsylvania Avenue because Fitch's note puts the large-scale spending of the United States on full blast.

Fitch Ratings didn't downgrade the United States because of four years of Donald Trump. I realize to some people that Donald Trump's term from 2017-2021 felt like fifty years, but it was only four. And Fitch Ratings points to issues with the United States going back two decades. The total corruption of the White House, the ineptitude of Congress, and America's growing debt give Fitch Ratings pause. And they're right.

Fitch Ratings Identifies the Problem.

The first thing that Fitch Ratings points to is the lack of control in Congress of tax and spending measures. Fitch says, "there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025. The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process."

Next, Fitch calls out the spending and funding issues with the United State's largest welfare programs: Medicare, Medicaid, and Social Security. Fitch says, "Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population."

No attempts at a solution.

They're right on that last mark. The last President to attempt any reform of Social Security was George W. Bush, and he was blasted for it. And then Barack Obama gifted the world the Affordable Care Act, aka Obamacare, which has done nothing to affordability and has instead been a giant gift to insurance companies.

Fitch also notes that the Federal Reserve will likely continue hiking interest rates, posing more challenges for the US economy. With that prognosis, Fitch calls for a recession: "Tighter credit conditions, weakening business investment, and a slowdown in consumption will push the US economy into a mild recession in 4Q23 and 1Q24, according to Fitch projections."

Fitch charts a path forward.

It's not all accusations, though. Fitch identifies the strengths of the American economy and how the rating can get put back in place. They also point out two positive paths. First, "Implementation of a fiscal adjustment to address rising mandatory spending or to fund such spending with additional revenues, resulting in a medium-term decline in the general government debt-to-GDP ratio."

Second, "A sustained reversal of the trend deterioration in governance." The short version is uncomplicated: the United States must get its fiscal and political house in order. We're spending like drunk pirates on shore leave and with a similar moral compass.

The press quickly jumped on an interview that Richard Francis, co-head of the Americas Sovereign Ratings at Fitch Ratings, gave CNBC. In that interview, he mentions January 6 as an example of the deterioration of public governance in the United States. But that's not the only point. It's one of many. Remember, Fitch Ratings is looking back two decades. A lot of water has passed under American bridges in that time.

The US should respond now - while it still has a chance.

You don't have to be a rocket scientist to see that the United States is on a poor financial path. The economy is strong, but the budget and leadership are poor. We're drafting off the previous administrations and generations that built the modern world. It's incumbent upon us not to squander that opportunity.

America is an exceptional country. Maintaining exceptionalism takes work between all parties to get to the right place. We don't have that in any way in any political party. Debt ceiling standoffs, no party passing a budget, a corrupt executive branch, and a weak and feckless Congress define our moment. America can afford to squander the moment because we have so much, but that can't be expected to last forever.

Eternal vigilance is the price of liberty (whether Jefferson said it or not, it's still true). It's fair to say the United States isn't that vigilant at the moment. Coasting on past accomplishments carries you for a time, but not forever. The Fitch Ratings downgrade should be a wake-up call to sober up and return to that vigilance. Lashing out at "Trump downgrades" when Fitch Ratings fully factored in the "adults in charge" of the Biden administration is a laughable response.

The Biden White House is trying to yell at everyone for responding to an alarm. That's the wrong reaction to a serious report.

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