Fitch Ratings—one of the Big Three credit rating agencies—downgraded U.S. government bonds after the debt ceiling showdown revealed Washington’s persistent inability to address rising federal debt, which is projected to reach levels unseen since the end of World War II.
In a bulletin issued on Aug. 1, the agency said, ” FitchRatings has downgraded the United States of America’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA’. The Rating Watch Negative was removed and a Stable Outlook (that was previously) assigned. The Country Ceiling has been affirmed at ‘AAA’.”
Fitch forecast a rising government deficit, which they expect to reach as much 6.3 percent of GDP in 2023, up from 3.7 percent in 2022.
Stocks slumped in response to the move, which was based on “expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance…” and the action was clearly a political statement aimed at President Joe Biden, who recently set out to sell the public on the virtues of ‘Bidenomics’ —widely considered a weak retreat from the failed ‘Reaganomics’ policies built on the discredited supply-side economic theories.
Whether one calls them Bidenomics or Reaganomics, these policies over the past 43 years have had a dominant influence on the US economy, which has responded with skyrocketing debt, an infrastructure left crumbling due to insufficient investment, and the evisceration of America’s working middle class.
Bidenomics and Reaganomics are both based on the theories of Austrian economists such as Carl Menger, Ludwig von Mises and Friedrich Hayek, who believed the free market is the most efficient means of allocating resources.
Keynesian economics comes from economist John Maynard Keynes, author of the 1936 book The General Theory of Employment, Interest and Money, who believed the government could manage demand to maximize economic growth and employment.
These two radically different schools of thought have yielded very different results over the four or five decades that they were put into practice in the United States.
Keynes’ ideas were the basis of President Roosevelt’s New Deal and President Johnson’s Great Society programs, which led to the greatest expansion of middle-class wealth in history, but the “trickle down” policies have resulted in massive inequality, accelerated cycles of boom and bust, and devastated the quality of living for average Americans since 1980.
Economists Thomas Piketty, Emmanuel Saez and Gabriel Zucman have documented the devastating toll that Reaganomics has taken on American workers. Today’s skyrocketing inequality, in which living standards for most Americans are stagnating as only the very rich are gaining at unprecedented levels, shows how badly the poor and middle class have fared.
“Martin Luther King’s ‘I Have a Dream’ speech was about the unfulfilled promise of economic freedom for some of America’s people. Instead of lifting them up, Reaganomics pushed more of us down,” said progressive Democrat Lisa McCormick. “Bleak living conditions among the working class in America are a direct result of Reaganomics, policies that imagined tax-cuts for the rich would ‘trickle down’ but actually created a crumbling infrastructure, $30 trillion national debt, and $120 trillion in unfunded liabilities.”
Insisting that Biden delivered the strongest recovery of any major economy in the world is not gaining the President any supporters, since people are struggling to afford food, housing, and other necessities, but the GOP is staking its hope for electoral success on its gambit to make matters worse and blame the other side.
“Republicans have talked about cutting spending and the danger of growing deficits, but their credibility is tarnished by their participation in corporate boondoggles like the CHIPS Act,” said Liz Peek, a former partner at the Wall Street investment firm Wertheim & Company.
Moody’s remains the last of the three major credit rating agencies to maintain a top rating for the United States after Fitch cut the sovereign rating this year from AAA to AA+ and Standard & Poor’s lowered it in 2011.
Moody’s said it would have downgraded the sovereign in case of a missed payment on its debt, but in its latest credit opinion, it expressed confidence in the strength of U.S. institutions, adding that monetary and macroeconomic policies have “a long history of effectiveness.”
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions,” said Fitch, explaining its decision.
“In Fitch’s view, 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 credit agency said. “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.”
“These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade,” said Fitch. “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.”