When it comes to bold predictions for the year ahead, one thing is surprisingly missing from the list: the United States losing its last remaining triple-A credit rating. It might sound dramatic, but if we take a closer look at the numbers and trends, it’s starting to seem more likely than ever.
It all began in August 2011 when Standard & Poor’s (S&P) made a shocking move by downgrading the U.S. credit rating from its top AAA to AA+. The reason? S&P cited the weakening effectiveness and stability of the country’s political system during a time of economic and fiscal challenges. Since then, things haven’t exactly improved.
Fast forward to August 2023, and Fitch Ratings followed in S&P’s footsteps, also downgrading the U.S. credit rating to AA+. Fitch pointed to a steady decline in the country’s governance standards over the past two decades, especially regarding fiscal and debt issues. Meanwhile, Moody’s still holds the top Aaa rating but issued a negative outlook in November 2023, citing political polarization as a threat to the country’s ability to manage its growing debt.
But here’s the thing: the financial picture has only gotten worse. The U.S. federal debt has now surpassed the size of the economy itself. To put this into perspective, we’re at the same level of debt-to-GDP ratio that we saw during World War II—when the country was willing to do whatever it took to defeat fascism.
And if that wasn’t enough, the fiscal deficit for 2024 is projected to reach $1.8 trillion, which is more than 6% of GDP, even though the country isn’t in a war and unemployment is low. On top of that, the Congressional Budget Office (CBO) is predicting annual deficits will stay at these high levels for the foreseeable future. If President-elect Donald Trump renews the tax cuts from his first term, we’re looking at another $4 trillion added to the national debt.
Now, despite all this, U.S. Treasuries—government bonds that were once considered the safest investment in the world—are still treated as top-notch securities by some. But savvy investors are starting to notice the cracks in the system. According to Jim Grant, a well-known financial expert, there are several warning signs that indicate the U.S. financial situation is far from stable. These include rising long-term interest rates, weak Treasury bond auctions, and inflationary pressures that resemble the economic conditions of the 1970s.
And then there’s the bond market itself. While the U.S. government still enjoys a good reputation, it’s losing its luster. For example, Apple, the world’s largest private company, recently issued bonds with the same AA+ rating as the U.S. Treasury, but those bonds are trading at a much smaller spread over U.S. Treasuries. This shows that investors may be starting to see government bonds as less “special” than they once were.
So, with all these signs pointing to a potential downgrade of the U.S. credit rating, what happens next? One potential solution, proposed by the Penn Wharton Budget Model, outlines a plan that could reduce the deficit by $10 trillion over the next 10 years and generate $59 trillion in revenue by 2054. But let’s be real—the chances of this plan being enacted are slim to none.
The political gridlock in Washington is a major hurdle. The current Republican-controlled House of Representatives is deeply divided, and as recent events show, even getting basic budgetary measures passed is a struggle. With interest on the national debt now surpassing military spending at over $1 trillion annually, and with Medicare and Social Security consuming 38% of the federal budget, the need for serious fiscal reform is clearer than ever.
But even if a budget overhaul isn’t in the cards, it’s clear that the U.S. is facing a serious financial reckoning. How the country addresses this growing debt crisis will determine whether it can maintain its top-tier credit rating or if it will be downgraded further. Stay tuned.
