For only the second time in history, a rating agency lowered the long-term credit rating of the United States on Tuesday.
Experts at Northeastern University greeted the news with a shrug.
“It’s news that they downgraded their grade, but it doesn’t really change anything,” says Robert K. Triest, professor and chair of Northeastern’s economics department. “There is unlikely to be any discernible impact on any real economic activity.”
Economy and public policy professor William Dickens agreed.
“The politicians will profit from this,” Dickens said. “But in terms of an economic event, I guess you won’t see it in the bond markets, because the information they’re based on already exists.”
On Tuesday, Fitch, one of the three major credit rating companies, along with S&P Global Ratings and Moody’s, lowered the long-term credit rating of the United States from its highest rating, AAA, to AA+. This is the second such rating downgrade in U.S. history. In 2011, amid conflict over the debt ceiling, S&P also lowered the United States’ rating from AAA to AA+, where it remains today.
Fitch cited the high and growing debt burden, as well as the debt ceiling brinkmanship, which are eroding confidence in the country’s fiscal management.
“Repeated political clashes over the debt ceiling and last-minute resolutions have eroded confidence in fiscal management,” Fitch said in a statement. “Furthermore, unlike most of its peers, the government does not have a medium-term budget framework and has a complex budget process. »
Fitch also cited rising levels of national debt due to tax cuts and spending. The company said the United States has made “limited progress” in addressing challenges related to the rising costs of programs such as Social Security and Medicare.
The news sent stocks and bonds are collapsing, at least according to the news electrical outlets (Triest says a “causal relationship” between the events is difficult to establish).
But what does the rating decision actually mean?
Basically, downgrade means that securities issued by the U.S. Treasury are not as safe as the safest bonds available in the sovereign bond market.
There are, however, a few factors that protect the United States from major economic disruption caused by the rating change.
First, the United States is a major economy with a major global presence.
“It’s not like when they downgrade the debt of a developing country, when people don’t know what’s going on there and don’t follow the policy,” Dickens says. “Downgrades can have an effect on small countries, but downgrades on the United States, where everyone knows our activities? It won’t matter.
Second, Triest highlights the status of the US dollar as the global reserve currency.
“U.S. Treasuries will always hold a special place in terms of where investors put their money,” says Triest.
But perhaps more importantly, the downgrade doesn’t say anything new, experts say.
“None of Fitch’s concerns are based on anything that has changed recently,” Triest says. “It reflects a concern, but nothing really new.”
“It’s sort of an indicator of the underlying symptom that we have: a deterioration of the political process that makes it more difficult for our government to resolve budgetary problems,” Triest continues. “But this has been decades in the making.”
Dickens agreed.
“If the bond market was going to react, it would have done so already, and it would have reacted a long time ago,” Dickens says.
Still, decommissioning is ripe for political sniping…with predictable battle lines.
“I would say that Republicans will see this as a sign that we need to limit spending,” Triest said. “Democrats will point out that this has other sources, particularly in the political gridlock in the Republican Congress.”
THE experts And The politicians did not disappoint.
In fact, degradation can be seen more as a political problem than an economic one.
“But the main thing is the political dysfunction – we are currently faced with the problem of passing budget bills, we managed to set the debt ceiling – and this type of political dysfunction is not conducive to a good fiscal policy,” says Triest. “That’s the problem. The Fitch downgrade is a symptom of the problem and, by itself, the Fitch downgrade doesn’t really matter.”
Cyrus Moulton is a reporter for Northeastern Global News. Send him an email to c.moulton@northeastern.edu. Follow him on Twitter@MoultonCyrus.
