With longer-term U.S. interest rates rising and no plan to reduce the budget deficit, is a U.S. national debt crisis imminent?
Topics covered include:
- Why S&P, Fitch, and now Moody’s stripped the U.S. of its pristine AAA debt rating
- How the U.S. national debt dynamics compare to Greece, Italy, and Japan
- What are four things investors should monitor for signs that the national debt crisis is worsening or spiraling out of control
Show Notes
The Long-Term Budget Outlook: 2025 to 2055—Congressional Budget Office
Walmart says higher prices could hit this month due to tariffs by Natalie Sherman—BBC
Post on May 17th, 2025; 7:27 AM by Donald J. Trump—Truth Social
Walmart responds to Trump comment that retailer should ‘eat the tariffs’ by Kyler Swaim—The Hill
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Transcript
Episode 525 – “No More AAA! What the U.S. Debt Downgrade Means for Investors”
Introduction
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein.
Today is episode 525. It’s titled, “No More AAA! What the U.S. Debt Downgrade Means for Investors.” Last Friday, the credit rating agency Moody’s downgraded the U.S. government debt. It lowered it to AA-1 from AAA.
Moody’s has a 21-notch rating system. The U.S. was at the highest level, now it’s at its second-highest level.
In this episode, we’ll explore what this downgrade means and whether we should be concerned as investors. Now,
2011 S&P Downgrade
I remember when the S&P stripped the U.S. of its AAA rating in 2011. This was the first rating agency to do so.
It happened August 5, 2011. I was still working as an institutional asset manager. A few weeks earlier, in July 2011, I had written and we had published our second quarter 2011 market commentary.
At the time, Congress had refused to raise the United States legal borrowing limit, the debt ceiling, as it was working to negotiate spending cuts in an attempt to reduce the budget deficit. The Congress had previously up to then raised the debt ceiling 16 times, but negotiations were bogged down.
The U.S. hit its borrowing limit on May 16, 2011. Treasury Secretary Tim Geithner suspended contribution to federal retirement funds and did other measures basically to allow the government to still function without borrowing money. But by August 2, the U.S. would be forced to default on its obligations.
In that commentary, I wrote, “Comparisons to Greece’s debt situation are inevitable, but the differences between the U.S. and Greece could not be more stark”.
The U.S. issues its own fiat currency, and its debts are denominated in that currency. That means it is physically impossible for the U.S. to default on its debt unless it chooses to do so willingly. It can also print more currency to make interest payments and pay down debt.
The U.S. does not issue debt or raise taxes in order to have money to spend. Under a fiat currency system, it spends electronically by debiting bank reserves and checking accounts. With the fiat currency, the only reason to issue debt or raise taxes is to manage the money supply so as to avoid inflation and not create too much money.
Now, obviously, there are statutory reasons to raise taxes, there’s accounting reasons, but because money is electronic, its digits it can be created out of thin air. I continued, “meanwhile Greece, as a member of the European Union, does not control its own sovereign currency and consequently has no means of paying outstanding liabilities which are denominated in the euro unless it raises tax revenues or imposes massive spending cuts”. And I pointed out that the bond market understands the difference between Greece and the U.S.
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