Take Fitch's Downgrade of the US Seriously, Not Literally
The loss of the AAA rating says nothing about America’s creditworthiness but underscores how its rising debt load may damage the economy.
Beware of the debt bomb.
Photographer: Keystone/Hulton Archive/Getty Images
The decision by Fitch to strip the US of its AAA credit rating, lowering it one level to AA+, means little in itself. There is next to zero chance the government won’t be able to pay its creditors and the Treasury Department’s access to funding is determined by forces far more fundamental than a few capital letters tied to a ratings report. That doesn’t mean the US’s rising debt burden isn’t a problem.
There are at least three ways in which increased federal borrowing could disrupt not jus the US economy and financial markets, but the global ones as well. The first and most worrying is the potential for a so-called debt bomb. Under this scenario, the government’s debt burden -which currently stands at $32.3 trillion - becomes so great that even a small increase in interest rates means the Treasury needs to borrow to just to cover the cost of servicing the debt. This leads to a vicious cycle, with the added borrowing discouraging buyers, driving interest rates higher and forcing even more borrowing. The resulting sky-high interest rates throws the economy into a deep recession.