Fitch Downgrades Profligate America - Wealth Week Episode 32

In 2023 speaking the truth can be a dangerous occupation. There’s a well defined playbook of denial, obfuscation and distraction to demonise the truth teller and attempt to weaken the impact of their message.
That’s what we’re seeing now with the reaction to Fitch downgrading the creditworthiness of Uncle Sam from triple A to AA+. It might sound like a school report card, but those three characters are backed up by masses of detail that is simply too powerful to ignore.
The person directly in the firing line for this criticism is former Fed chief now Treasury Secretary Janet Yellen. Her response has been predictable. “I strongly disagree with Fitch Ratings’ decision. The change is arbitrary and based on outdated data.” Also implicated in the downgrade is former Treasury Secretary Larry Summers who called the downgrade “bizarre and inept,” while in his opinion America’s economy “looks stronger than expected.”
So, having asked these turkeys what they think of Christmas, let’s delve a bit deeper into why Fitch has now matched S&P’s 2011 downgrade leaving only Moody’s of the opinion that America deserves its AAA rating. Fitch say that the downgrade reflects both a steady deterioration in governance standards over the last 20 years, as well as the expected fiscal deterioration of the coming three years. So the culprits are the administrations of Presidents Biden, Trump, Obama and Bush. It seems like, just as in Britain, a Uniparty approach to government means that neither side can be relied on to exercise some fiscal prudence. It’s just spend, spend, spend to buy votes and try to stay in office for a few more years.
Let me quote directly from the Fitch report: “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. 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”.
So, the overall narrative is a long-term loss of confidence in governments of any stripe to get on top of unaffordable spending plans or to even have an outline plan for how to bring things under control in the years ahead. Unlike the hysterical reactions from those whose job is to be on top of these things, Fitch has plenty of data to back up its concerns. The combination of new spending initiatives, a lower tax take and higher interest costs mean that the overall federal deficit will almost double from 3.7% of GDP last year to 6.3% this year. That’s a deficit of $1.46 trillion, more than the annual GDP of Vietnam, the Netherlands or Argentina.
The much-touted spending cuts agreed during the brinksmanship of the debt ceiling negotiations will amount to just 0.3% of GDP next year and 0.4% in 2025. There are no other cuts on the horizon. This barely compensates for the forecast widening of the deficit to 6.6% in 2024 and 6.9% the year after, driven by poor GDP growth and ever-increasing costs of servicing the debt burden.
One of the key measures Fitch use to assess the creditworthiness of a country is the Interest to Revenue ratio, in other words how much they are receiving in taxation versus how much they are paying on all the debt they’ve accumulated over the years. For a typical Triple A rated country this ratio would be just 1%, while for an AA+ country the average would be around 2.8%. By the time Sleepy Joe’s spending plans take effect in 2025 the American Interest to Revenue ratio will be a whopping 10%, that’s 10 times where it should be and nearly four times worse than even the new reduced rating should suggest. Fitch is simply pointing out that the King has no clothes and has been pilloried for the observation.