{"id":7741,"date":"2023-08-03T01:51:18","date_gmt":"2023-08-03T01:51:18","guid":{"rendered":"https:\/\/mysourcefunding.com\/leadership\/should-we-downgrade-fitch-or-the-usa\/"},"modified":"2023-08-03T01:51:19","modified_gmt":"2023-08-03T01:51:19","slug":"should-we-downgrade-fitch-or-the-usa","status":"publish","type":"post","link":"https:\/\/mysourcefunding.com\/?p=7741","title":{"rendered":"Should We Downgrade Fitch Or The USA?"},"content":{"rendered":"
\n

Yesterday, Fitch issued a downgrade of US long-term debt from AAA to AA+. Is there a universe in which this makes sense or is it Fitch that deserves a downgrade?<\/p>\n

First and foremost, it needs to be made clear that it is impossible for the United States to be forced into default on debt denominated in dollars. Not unlikely, not improbable, but impossible. However, don\u2019t take my word for it:<\/p>\n

\u201cThe United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” Alan Greenspan \u201cIn the case of United States, default is absolutely impossible. All U.S. government debt is denominated in U.S. dollar assets.\u201d Peter Zeihan, Vice President of Analysis for STRATFOR <\/em><\/p>\n

\u201cIn the case of governments boasting monetary sovereignty and debt denominated in its own currency, like the United States (but also Japan and the UK), it is technically impossible to fall into debt default.\u201d Erwan Mahe, European asset allocation and options strategies adviser<\/em><\/p>\n

<\/fbs-ad><\/p>\n

\u201cThere is never a risk of default for a sovereign nation that issues its own free-floating currency and where its debts are denominated in that currency.\u201d Mike Norman, Chief Economist for John Thomas Financial <\/em><\/p>\n

\u201cThere is no inherent limit on federal expenses and therefore on federal spending\u2026When the U.S. government decides to spend fiat money, it adds to its banking reserve system and when it taxes or borrows (issues Treasury securities) it drains reserves from its banking system. These reserve operations are done solely to maintain the target Federal Funds rate.\u201d Monty Agarwal , managing partner and chief investment officer of MA Managed Futures Fund <\/em><\/p>\n

\u201cAs the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.\u201d Federal Reserve Bank of St. Louis <\/em><\/p>\n

\u201cA sovereign government can always make payments as they come due by crediting bank accounts \u2014 something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks.\u201d L. Randall Wray, Professor of Economics and Senior Scholar, Levy Economics Institute<\/em><\/p>\n

This doesn\u2019t mean that there can\u2019t be other consequences, like inflation or crowding out of the private sector (both of which also require at that we are already at full employment), but default is off the table<\/strong>.<\/p>\n

How does this match what AAA means to Fitch? Their own definition is:<\/p>\n

\u201c’AAA’ ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.\u201d<\/em><\/p>\n

Sounds like the US is AAA to me!<\/p>\n

Or is it? To be fair, let\u2019s have a look at the specific reasons Fitch lowered the rating:<\/p>\n

    \n
  1. the expected fiscal deterioration over the next three years,<\/li>\n
  2. a high and growing general government debt burden,<\/li>\n
  3. the erosion of governance…over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.<\/li>\n<\/ol>\n

    Numbers 1 and 2 betray an ignorance of the manner in which federal government financing actually works, which is not terribly encouraging. That\u2019s strikes one and two against Fitch. But it\u2019s hard to argue with #3, at least not the part reflected in further comments later in the document: \u201cthere has been a steady deterioration in standards of governance over the last 20 years.\u201d<\/p>\n

    No doubt, at least<\/em> 20 years.<\/p>\n

    Can the US be forced into debt default?<\/p>\n

    Never. Shame on you, Fitch.<\/p>\n

    Could the gridlocked, highly-partisan, and dysfunctional US government prevent us from meeting financial obligations we absolutely have the legal and economic ability to meet?<\/p>\n

    Yes. Shame on us, United States. And for that, the debt is the least of our worries.<\/p>\n<\/div>\n

    Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    Yesterday, Fitch issued a downgrade of US long-term debt from AAA to AA+. Is there a universe in which this makes sense or is it Fitch that deserves a downgrade? First and foremost, it needs to be made clear that it is impossible for the United States to be forced into default on debt denominated […]<\/p>\n","protected":false},"author":1,"featured_media":7742,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[76],"tags":[],"class_list":{"0":"post-7741","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-leadership"},"yoast_head":"\nShould We Downgrade Fitch Or The USA? | Brandiary<\/title>\n<meta name=\"description\" content=\"Yesterday, Fitch issued a downgrade of US long-term debt from AAA to AA+. 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