Fitch downgrades the US

It's another week of big stories coming out of the US and no, a fresh indictment of Donald Trump is not the most important. The downgrading of the US debt rating by Fitch Ratings, from AAA to AA+ may not have grabbed many headlines, but that's probably because few editors grasp the significance. According to Fitch the downgrade reflects an "expected fiscal deterioration over the next three years" and a "high and growing government debt burden". In other words Fitch reckons America's inability to take sufficient tax revenues to cover the amount spent by federal government is going to get worse over the next three years. It also reckons that the enormous national debt - now rapidly approaching $33 trillion - is just going to get even bigger. Fitch expects US debt-to-GDP (gross domestic product) ratio to rise to more than 118% by 2025. "The repeated debt limit political standoffs and last-minute resolutions have eroded confidence in [Washington's] fiscal management," added Fitch. Inevitably this drew criticism from the White House and its cheerleaders. Secretary of the Treasury Janet Yellen called the Fitch decision "arbitrary and based on outdated data".

Does this downgrade matter? There are two ways of looking at this - short and long term.

In the short term US government bonds have now dropped to the level of those occupied by Austria, Canada, Finland and New Zealand. No-one imagines that those countries have difficulty placing government debt. Government bonds from those countries are high-quality but they are perceived to have a slightly raised long-term investment risk.

Some are starting to worry about the long term. The chief economist of Mizuho Securities USA put it in a nutshell. He told Reuters that it was an "unsustainable budget situation because the economy can't even grow its way out of this problem...they're going to have to either tackle it or accept the consequences of potential further additional downgrades." The Congressional Budget Office (CBO) has estimated that the average fiscal deficit (which is covered by borrowing and/or money printing) will rise to more than 6% of GDP from 2024 to 2033; it says debt will rise to $46.4 trillion at the end of 2033.