Source : THE AGE NEWS
It’s not a coincidence that Moody’s has lowered America’s credit rating just as the fate of the Republicans’ mega tax and spending cuts bill nears its decisive moment.
Moody’s, on Friday, became the last of the big three credit ratings agencies to downgrade the US, cutting its triple-A rating to Aa1. S&P Global (formerly Standard & Poor’s) lowered its rating in 2011 and Fitch its in 2023.
Trump’s “America First” unilateralism, and his economic illiteracy, has unsettled allies and investors.Credit: Getty Images
At a practical level, the decision to remove the triple-A rating probably won’t mean much, though the yield on US 10-year bonds did blip up slightly on Friday after news of the move. In 2011, when S&P’s move during the Obama administration came as more of a shock, there was a major sell-off in the sharemarket, but it was short-lived.
What it does do is add to the focus on America’s public finances just as the “One, Big, Beautiful Bill” (seriously?) is nearing passage in the House of Congress, although it was blocked by hardline Republicans on Friday, who want bigger spending cuts.
The core of the proposed budget bill is an extension of the big 2017 Trump tax cuts scheduled to expire on December 31, along with his campaign promises of tax exemptions for tips and overtime, larger deductions for social security recipients, deductions for interest on vehicle loans, higher deductions for state taxes and $US1000 ($1560) “MAGA” accounts for newborn babies.
The increased spending would be offset to some degree by some spending cuts, mainly to Medicaid, food stamps and Joe Biden’s climate-related incentives.
While US Treasury Secretary Scott Bessent described Moody’s action as “a lagging indicator” and blamed the Biden administration and the spending the Trump administration inherited for America’s fiscal position, the agency referred to the legislation with the very “Trumpish” title that the House Republican leadership is trying to push through Congress.
“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration,” it said.
“Over the next decade, we expect larger deficits as entitlements spending rises while government revenue remains broadly flat.
“In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The US fiscal performance is likely to deteriorate relative to its own past and compared to other highly rated sovereigns.”
US debt is ballooning. Credit: Bloomberg
US government debt has ballooned over the past decade.
It was just under $US20 trillion when Donald Trump first took office, but had swollen to $US27.7 trillion by the start of the Biden administration, with Trump’s 2017 $US4.5 trillion “Tax and Jobs Act” the major influence.
It is now $US36.2 trillion, thanks to Biden’s massive spending on climate-related concessions, infrastructure spending and his CHIPS and Science Act.
In March, the Congressional Budget Office released its projections for US debt and deficits, saying the deficit would fall from last year’s 6.4 per cent of gross domestic product to 6.1 per cent over the next decade. Debt would, however, rise from 98 per cent of GDP in 2024 to 118 per cent in 2035.
More recently, it has factored in the One, Big, Beautiful Bill.
That would, it says, increase annual deficits from $US1.9 trillion to $US2.9 trillion in 2034, or 6.9 per cent of GDP, or as much as $US3.3 trillion and 7.8 per cent of GDP if some measures in the bill, which are scheduled to expire at the end of Trump’s term, were made permanent.
(Some of the “temporary” measures are only temporary to try to make the bill look less profligate, while others look like an inducement for his supporters while he is in office, with their expiry his successor’s problem.)
Debt would increase by $US3.3 trillion by 2034 – $US5.2 trillion if the spending measures were made permanent – or to 125 per cent of GDP (129 per cent if permanent). Annual interest costs would rise between $US1.8 trillion (4.2 per cent of GDP) and $US1.9 trillion (4.4 per cent of GDP).
In other words, this big, beautiful bill would take a fiscal position that, in any economy without America’s privileged position, would already be unsustainable – and make it worse.
Trump’s aggressive policies have hurt the US dollar.Credit:
Moreover, given Trump’s tax package is highly regressive – the wealthy would continue to benefit significantly while lower income households see little or no benefit – it would exacerbate inequality.
Moody’s, while cutting America’s rating, awarded the US a stable outlook because of a history of effective monetary policy led by an independent Federal Reserve, the constitutional separation of powers and America’s unique status and the world’s dominant reserve currency provider.
Those attributes are being tested by the current administration.
Trump has routinely criticised the Fed and its chairman, Jerome Powell, threatened to sack Powell (until the market’s reactions caused him to back off) and is expected to insert his own nominees into the Fed at every available opportunity. He would subvert the Fed’s independence if he thought financial markets would let him.
With Trump effectively ignoring Congress and governing via executive orders, many of which have dubious legal or constitutional authority, and disregarding Supreme Court orders on immigration, the separation of powers doctrine in the US is being tested by his administration.
The US dollar is the world’s reserve currency, but it has depreciated by more than 8 per cent against a basket of its major trading partners’ currencies, and there have been indications of capital outflows, or at least reduced inflows, as a result of Trump’s aggressive trade policies.
While financial markets have calmed since Trump announced 90-day pauses of his proposed “reciprocal” tariffs and his 145 per cent tariff on imports on China was reduced (temporarily?) to 30 per cent, before those stays there was a strong “sell America” mood among foreign investors.
Given that Trump’s tax package is highly regressive – the wealthy would continue to benefit significantly while lower income households see little or no benefit – it would exacerbate inequality.
When the 90-day pauses end, the administration is now saying it will replace its “reciprocal” tariffs, which were supposed to be negotiated trade deals, with unilateral tariffs.
“I own the store [the US economy] and I set prices,” Trump has said.
The tariffs, their impact on the US economy and their impact on America’s trade partners have the potential to be highly disruptive and negative for the US and the rest of the world.
They risk a self-induced recession in the US (and deficits and debt that are an even higher proportion of GDP as a consequence) while slowing growth around the world.
They also place a question mark over something of longer-term consequence than the short-term ebbs and flows in economic activity in the US and elsewhere.
Trump’s “America First” unilateralism, and his economic illiteracy, has unsettled allies and the investors needed to buy the swelling tide of government debt that the US is already issuing, even before the effects of the One, Big, Beautiful Bill start flowing.
If Trump’s trade war were to cause more capital to flow out of the US than flows in, initially it would result in higher interest costs and bigger deficits and debt than would already be the case.
Longer term, it could undermine the reserve currency status of the dollar, which is America’s greatest financial asset. It helps prevent the US from experiencing the external pressures and the risk of a financial crisis that any other economy with its deteriorating fiscal outlook would face.
Between them, Trump’s tariffs and the One, Big, Beautiful Bill will reshape America’s economy and society, not necessarily in a way that Americans expected when they voted last year, and not necessarily for the better. Indeed, the risks are heavily weighted to the downside.
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