Moody’s Negative Outlook for America
Alarm bells are being sounded as the creditworthiness of the world’s most powerful economy is coming into question. Moody’s Investor Service lowered its ratings outlook for the US government from stable to negative. While they may not automatically downgrade America’s financial credibility, the chances of it happening have leapt. A downgrade could have severe negative consequences.
There are three major credit agencies that rate the United States. Moody’s is the only one to assign the US an outstanding rating of AAA. The US has had that rating from Moody’s since 1917. This past August, Fitch cut the US rating to AA+ from AAA. They cited “expected fiscal deterioration over the next three years.” They also pointed to an erosion of governance and a growing debt burden. The credit rating got knocked down after the most recent debt ceiling debate. Furthermore, Standard and Poor’s downgraded the US for the first time in 2011. They did it after the debt ceiling standoff that year.1
Currently, the US still has their AAA rating. But now, Moody’s is open to downgrade it.
Even the prospect of a US downgrade could hurt American investment portfolios. A potential downgrade can make it more expensive to borrow money. It would also make it more costly for the government to pay its debts. These conditions will get drastically worse if Moody’s decides to go through with a downgrade.
Reasons for Downgrade
Moody’s pointed to rising risks in the nation’s fiscal strength. The negative outlook is happening as the country faces another government shutdown. Congress is struggling to resolve the shutdown before the Nov 17 deadline.
The US government’s poor debt management is apparent. The deficit jumped from $1.38 trillion to $1.7 trillion in the budget year ending September 30th. And the national debt crossed an astronomical $31.7 trillion dollars. The interest on which is on track to hit $1 trillion a year.3
“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues,” the agency said, “Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability.”4
The Treasury Department disagreed with the shift to a negative outlook. They said, “The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset.”5
Political instability at the center of Moody’s decision. The government’s inability to manage its finances is ruining its creditworthiness. They believe the continuing political divide will result in a government unable to come up with a viable debt plan. They cited several events that demonstrate the political divide.
Moody’s referenced the ouster of House Speaker Kevin McCarthy. It was the first time in history a speaker was given the boot. Congress’ trouble finding a new Speaker further worsened Moody’s sentiment. It inspired fears that the government will be unable to avoid the looming government shutdown and pass a reasonable budget.
Moody’s will now do a more thorough review of US debt to determine if a downgrade is necessary.
Impact of a Downgrade
US debt has long been considered the safest of safe havens. The downgrade by several agencies is calling that safety into question.
A downgrade would likely cause US Treasury yields to rise because investors would see more risk in loaning money to the government. US Treasury rates influence all kinds of debt. The cost of mortgages, car loans, and credit cards could surge even higher than their current record levels.
Kevin O’Leary is the chairman of O’Leary funds, a $1.5 billion mutual fund company, and star of ABC’s Shark Tank. He raised the alert about the consequences of a downgrade after Fitch did it in August.
“It’s impossible to paint this downgrade with a positive brush in any way at all… It is a big deal. There’s less confidence, period,” he said. “If ever the world thinks we’re unable to pay our bills and would default on them, that’s when it’s all over.”6
O’Leary warned it would cost the government more to finance its debt. Those interest costs would consume the US budget. They could leave nothing for domestic spending, potentially cutting into things like Social Security and defense. Also, no money would be available for stimulus to lift the country out of recession.
O’Leary fears it will hit everyday Americans the hardest. “You’ve got a really big problem starting to emerge in mainstream America… the real economy is ma and pa, first generation and second generation family business… they’ve got big issues on the cost of capital. They can’t even get loans.”7
We are living in an America in decline. It’s reputation and creditworthiness are on a downward trajectory. The consequences of which are far-reaching. In this time, people looking to protect their savings should consider finding new safe havens as Treasuries become riskier. Physical precious metals are time-tested safe haven asset. “I like gold because it is a stabilizer, it is an insurance policy,”8 said O’Leary. A Gold IRA from American Hartford Gold can help secure your financial future as the American economy grows dangerously untrustworthy. Contact us today at 800-462-0071 to learn more.