The Unresolved Issue of US Credit Rating and Its Impact

For several years, the issue of the US credit rating has been a persistent concern, especially in light of the economy's recovery from the downturns faced in 2011 and 2023. Despite significant improvements in economic indicators, the ongoing gridlock in Washington has raised eyebrows in rating agencies, leading to a critical examination of the US's creditworthiness.

Why Has SP Not Upgraded the US Credit Rating?

The SP downgrade in 2011 was for the same reasons as the Fitch downgrade in 2023. Both ratings agencies are not concerned about the US government's ability to make payments due to its economic might. However, the persistent political gridlock poses a significant risk. Americans have a peculiar habit of negotiating through 'chicken' games with the debt ceiling, a practice that has not changed and may even have worsened since 2011. This behavior can lead to a default, as evidenced by the phrase 'playing chicken is all fun and games until you get hit by a train'.

Impact of Adding More Debt

The credit rating is fundamentally based on the ability to pay. Since the US government spends more than it earns, this ability is diminished. Even if the economy is stronger and brings in more tax revenue, spending grows faster due to the power to create money. If the debt grows faster than income, the debt becomes riskier and is rated accordingly. The US's advantage of being able to tax 330 million people is significant, but as the debt grows beyond the economy's capacity to pay, the credit rating is downgraded. This is a serious issue, as the debt could grow to a point where even with all available resources, it would be impossible to repay.

The 2011 Credit Rating Downgrade: A Deeper Look

The downgrade in 2011 was not due to the state of the US economy, but rather the unsustainable fiscal policy of the US Congress, particularly regarding entitlement programs and the growing risk of sovereign default. Since the downgrade, Congress has not taken steps to mitigate this fiscal crisis. Instead, they have continued to borrow more money, increasing the risk of default. As noted by SP Global:

"We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process."

The fundamental issue addressed in SP Global's report is the unsustainable benefits of entitlement programs, which exceed achievable federal tax revenues and the maximum amount of public national debt that can be serviced as a percentage of GDP. This overcommitment to entitlement spending and the inability to control it are crucial factors in the persistent credit rating concerns.

Path Forward for US Creditworthiness

To address the issue of US creditworthiness, two main steps are necessary:

Reduce future entitlement program payouts to levels that the nation can demonstrably afford. This is crucial given the current taxation rates, which operate at a certain percentage of US GDP. Eliminate as many laws and regulations at all levels that impede or prevent economic growth, such as laws that hinder competition. Economic growth is the primary way to afford more entitlement program payouts in the future.

These changes would ensure that the US can maintain a solid credit rating. Failure to do so could lead to continued deterioration of the credit ratings of the federal government.

Conclusion

The unresolved issues surrounding the US credit rating are rooted in fiscal imbalances and political gridlock. Addressing these issues through concrete legislative changes is essential to improving the credit outlook and ensuring the long-term stability of the US financial system. The coming years will be crucial in determining whether meaningful action will be taken to avert potential financial crises.

Note: The above analysis is based on expert opinions and data from reputable sources, including SP Global reports and economic analyses. Continuous monitoring and adaptation of fiscal and regulatory policies are necessary to maintain the US's financial health and credit rating.