Moody’s Puts U.S. Government’s Last AAA Credit Score in Jeopardy

On Friday, November 10, 2023, Moody’s Investors Service sent Washington, D.C.’s politicians and bureaucrats a clear warning. The credit rating service announced it was changing its outlook on its AAA credit rating for the U.S. government from “stable” to “negative.”

That statement is a proverbial shot across the bow. It means the U.S. government is now at high risk of losing its top credit rating status. It is already two-thirds of the way there, following Standard & Poor’s downgrade of the U.S. government’s credit rating in 2011 and Fitch Rating’s downgrade this past summer. Both credit grading services stripped the U.S. government of their top credit scores, and the government pays more to borrow to support its excessive spending as a result.

Following its announcement, Moody’s is poised to make it a clean sweep within the next 18 to 24 months without action by politicians to address the U.S. government’s worsening fiscal situation. Reuters interviewed Moody’s William Foster, who explained why Moody’s is not optimistic:

Moody’s changed the U.S. credit outlook to negative from stable on Friday, citing larger fiscal deficits and a decline in debt affordability.

“Any type of significant policy response that we might be able to see to this declining fiscal strength probably wouldn’t happen until 2025 because of the reality of the political calendar next year,” William Foster, a senior vice president at Moody’s, told Reuters….

An environment of higher interest rates will likely result in higher interest payments and higher deficits, said Foster.

“And so, the question from our perspective moving forward is to what extent the government will be able to address that through fiscal policy measures that will reduce deficits moving forward, either through higher revenues, or reducing primary spending,” he said.

Why is Moody’s citing these things now? The combination of falling government revenues, poor fiscal management, and a broken budget process enables excessive spending. Let’s take a short look at each.

Falling Revenues

Despite increasing taxes in 2022, the U.S. government’s revenue from tax collections fell in 2023. Over the past year, the Biden administration has also shrunk government revenues through various measures to reduce student loan payments and its wasteful green energy tax credits.

Poor Fiscal Management

Poor fiscal management at the U.S. Treasury Department has also played a role. The Biden administration squandered the opportunity to restructure and refinance much of the U.S. national debt at the historically low interest rates that were in place before the Federal Reserve began hiking rates in March 2022 to fight inflation caused in part by excessive government spending.

That failure, according to Stan Druckenmiller, is perhaps the worst fiscal blunder in U.S. history. His comments are in the following video, between the 4:11 and 8:00 minute marks.

A Broken Budget Process

Things aren’t much better in the U.S. Congress, where the process for simply passing a budget has been broken for decades. When it does pass spending legislation, it features excessive spending and is almost always pushed through at the point when the government would otherwise shut down without it.

The Bottom Line

All of these things have become worse over the last two years. None of these things are truly fiscally sustainable for the U.S. government. Serious fiscal reforms are needed. Herbert Stein had it right: “If something cannot go on forever it will stop.”