Friday brought the news that Moody’s, one of the three agencies that evaluate U.S. government debt, downgraded that debt to Aa1. This has triggered lots of commentary and investment houses are actually reaching out to investors to “discuss” what this means.
This is not my area but it in a broader sense it is the concern of every American who invests or hopes someday to benefit from our social security and Medicare programs. So, I tried to survey what I could in terms of seminars and professional writing. And, here is my layman’s take. The subject needs to be approached with a lot of care. This, once largely economic topic has taken on a huge political aspect. Second, the investment community has a vested interest in not just keeping our portfolios but in continuing to woo us to invest. It’s how their bread is buttered. We tend to forget that if we are 401K participants, we are investing everytime we are paid.
A lot of what I listened to was pretty esoteric. The six fund managers from Dreyfus and BNY Mellon I heard this morning were focused on how foreign markets will respond to the ratings cut. The first news is that Moody’s was actually the last of the big three credit agencies to cut the U.S. rating. Fitch and Standard & Poors did this years ago. It seems that Moody’s may be reacting more to the political turbulence of the last 4 months because there seems no clear path toward either continuing the 2017 tax relief (due to expire next year) or toward cutting a deficit that hasn’t much slowed since 2020 when Covid came to visit. We weren’t on a good course before Covid but the government was borrowing at low rates. Now the debt incurred during and after Covid has nearly doubled (from $20 to 36 trillion) and we are paying neary 4.5% to pay that debt.
So, what is the poor man’s takeaway from all of this. All the commentators seem agreed this is not the time to abandon stocks and bonds to buy gold (although if you bought it a year ago your $2,300 ounce is closing in on $3,300). But the concensus is that investors are tacking away from the United States as the cornerstone of world currency and investment markets. The good news is that for now, there really aren’t other reasonable choices. China is still struggling with its own economic crisis and lots of people think their data is not honest. The European Union is, as Great Britain showed, a consortium of countries some of which are very strong (e.g. Germany) while others struggle with slow growth and enormous debt. In a word, we still attract investors both for U.S. debt and other investments because we have been the mainstay for 75 years. Moreoever, our markets have relatively solid regulation through the S.E.C. and we have lots of independent eyes watching what we do.
The challenge of the day is our own fiscal policy. Our debt has exploded. The current administration has said each of the following: (a) we will cut taxes (b) we will substitute tariffs for personal income taxes (c) we will balance the budget (d) we won’t make serious cuts to our most expensive programs (e.g., social security, medicare, medicaid, defense). The rest of the world is looking on, scratching their foreign heads and asking: “How you gonna do all those things?” Many of the people running foreign economies in the Middle and Far East are economists trained in prestigious American universities. They saw the DOGE was preceded by far better organized groups devoted to balancing the budget. Alas, the Grace Commission (under Reagan) and the Simpson-Bowles initiatives (under Obama) all foundered on the rocks of our belief that the American economy could be stimulated to outgrow the deficit. We are stilling hearing elements of that optimism from conservative groups while their liberal counterparts seem to ignore the elephant in the room.
The good news remains that aside from a debt ceiling which is causing the Treasury Department to scramble and the fact that we are still operating under an extension of the much maligned Biden budget, we aren’t in any instant danger. But cracks are appearing in the hull of the ship. Witness the fact that in Delaware County, Pennsylvania (the state’s fourth wealthiest) a 400 bed primary care hospital and trauma center abruptly closed this month when no one would acquire it. In 2022, nearby Chester County saw the abrupt closure of two primary care hospitals with a combined 200 beds. Chester is Pennsylvania’s wealthiest county. The transportation system of the Philadelphia region’s $500 billion economy is without a budget. These things are the infrastructure that supports 6,200,000 people living in Metro Philadelphia. And the people who lend us the money to make all of these things work are demanding higher interest rate and looking at other places to invest. Smoke, mirrors and our everlasting promises for government efficiency are not going to cut it much longer.
Oh yes, some may rightly ask, how this relates to a Domestic Relations blog. As we have tried to point out, divorce is a financial transaction. People who have experienced it or are now confronting it must pay some attention to their financial resources in the future. Friday’s after market news from Moody’s did not have any effect on either the markets or the dollar today (5/19). But there are caution lights ahead as Congress tackles a tax bill and a budget. You can go on line and see an estimate of what will be your projected social security benefits and Medicare costs. Lots of our representatives in Washington say this is a sacred obligation. We shall see.