The decision last week by the rating agency Moody’s to downgrade the outlook on the credit status of US government debt from “stable” to “negative” is notable. While still retaining it at AAA, Moody’s update is another expression of American capitalism’s ever-worsening fiscal and financial position and the political turmoil that is both accompanying and feeding into it.
The New York Stock Exchange [AP Photo/J. David Ake]
It followed the move by the rating agency Fitch to lower its long-term rating for the US from AAA to AA+ in August and the S&P downgrade of US debt in 2011.
Moody’s has not gone that far, at least not yet, but the move to “negative” status often precedes an outright downgrade.
The driving forces for the decision are the increase in the US budget deficit, much of it the result of increased military spending, the sharp increase in the interest bill on the debt because of the rate hikes carried out by the US Federal Reserve and the conflicts in Congress which have led to repeated threats of shutdowns of government services.
This Friday, a government shutdown is once again looming—they have become an almost perpetual feature of the political landscape—when a 45-day deal between the Biden administration and the Republican-controlled House of Representatives to avert the last crisis and maintain government funding expires.
That deal led to House Speaker Kevin McCarthy losing his position, sparking a revolt led by aggressive Trump supporters which, after weeks of wrangling, resulted in the extreme right-winger Mike Johnson filling the post.
Announcing its decision, Moody’s said: “In the context of higher interest rates, without effective policy measures to reduce government spending or increase revenues, Moody’s expects that the US fiscal deficits will remain very large, significantly weakening debt affordability.”
It warned that continued polarisation within Congress “raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt sustainability.”
The interest rate increases, from near zero to almost 5 percent since rises began in March 2022, are having a major impact. In the third quarter of this year the interest bill on government debt was running at an annual rate of $981 billion, an increase of 54 percent from the first quarter of 2022, and up by 91 percent from the second quarter of 2020.
The US government debt is now more than $33 trillion and rising and stands above 120 percent of gross domestic product (GDP).
In a comment piece in the New York Times, columnist Peter Coy recalled that four years ago Olivier Blanchard, a former International Monetary Fund official now at MIT, had said it was possible for a government to run moderate budget deficits forever so long as economic growth exceeded the interest rate.
“The problem,” he continued, “is that deficits in the US have been large, not moderate, and the interest rate on debt now exceeds the economy’s growth rate, rather than vice versa.”
Long-term interest rates are now pushing towards 5 percent while US economic growth is not expected to go much above 2 percent and could even move into recession in the next year.
In a post for the Peterson Institute for International Economics, Blanchard said he freely admitted he did not predict the rise in long-term rates.
This failure only points to a more fundamental issue, that of methodology.
Notwithstanding its highly developed mathematical models and the availability of vast computing power, bourgeois economics assumes that the capitalist profit system is the only possible and viable form of economic organisation. It therefore ignores its inherent contradictions until they erupt in the form of crisis which it then puts down to some kind of accident or external factor.
This outlook is reflected in the political sphere. It was seen in the Biden administration’s response to the Moody’s downgrade, largely based on the attempt to assert that all was still for the best in the best of all possible worlds.
Deputy Treasury secretary Wally Adeyemo said that while Moody’s had retained the AAA rating, “we disagree with the shift to a negative outlook.
“The American economy remains strong, and Treasury securities are the world’s pre-eminent safe and liquid asset.”