US Credit Rating: The Threat From Within

America may lose its last top credit rating.

The decision by Moody’s to change its sovereign outlook to negative from stable suggests it’s just a matter of time before the ratings agency follows Fitch and S&P in downgrading the US.

If that happens, the US will deserve it. But not because of any deterioration in “debt affordability” or related concerns about alleged fiscal “excess.”

The country has chosen grievance politics and everything that goes along with it. The political center is increasingly beholden to the poles, particularly among Republicans in the House, where business was paralyzed last month by far-right lawmakers pursuing intra-party vendettas.

Donald Trump, a twice-impeached former president, is effectively running unopposed for his party’s presidential nomination despite four criminal indictments, two of which center on a clumsy, but ultimately deadly, conspiracy to overturn the democratic process in the last election. His very presence on the campaign trail arguably suggests the rule of law is no longer universally applicable in America. Just this week, Trump was allowed to berate the judge in a civil fraud trial from the witness stand with what seemed like impunity.

The Supreme Court is leaning against the will of the society it’s entrusted to serve (ask Ohio), and recent revelations suggest the high court is bought and paid for to a degree that goes well beyond what casual observers (which is to say everyday citizens) might “reasonably” expect from an almost completely unaccountable panel of jurists with lifetime appointments.

I could go on, but this is well-worn territory. America is, as I’ve put it time and again, suffering from an acute institutional credibility crisis that now borders on the existential. To the extent rule of law and institutional credibility are prerequisites for a top credit rating, America doesn’t deserve such a rating.

Moody’s, in changing its outlook on the US to negative from stable late Friday, warned that “multiple events have illustrated the depth of political divisions in the US.” The ratings agency cited “renewed debt limit brinkmanship, the first ouster of a House Speaker in US history, prolonged inability of Congress to select a new House Speaker and increased threats of another partial government shutdown.” Political polarization, Moody’s went on, “is likely to continue.”

As was the case with Fitch (which downgraded the US over the summer) and S&P (which took the plunge more than a dozen years ago), Moody’s dedicated most of its energy to elaborating on the deterioration of America’s “fiscal strength.” I won’t dwell on the numbers. They don’t matter, or if they do, they matter far less for the US than any other sovereign.

The problem for Moody’s (and Fitch and S&P) is that you have to acknowledge America’s “unique credit strengths” (as Moody’s put it) while positing a scenario in which fiscal challenges “may no longer be fully offset” by that uniqueness (to quote Moody’s again). Assuming there’s some threshold beyond which American exceptionalism in all its various manifestations (including the dollar’s reserve currency status) no longer overrides the appearance of fiscal profligacy for the purposes of sovereign ratings, it’s impossible to say where that threshold is.

I don’t think there is such a threshold, and you don’t have to get into an MMT debate to make the case. There’s something logically inconsistent about the idea that the issuer of the reserve currency can be a more risky credit than the users of that currency in a world where there’s no alternative. Further, the byproduct of US deficits (Treasurys) is indispensable as a vehicle for global savings and as the collateral that makes the world spin.

The US doesn’t have “debt.” Other than happiness, there isn’t anything in the world that US dollars can’t buy. By contrast, there’s plenty that Turkish lira can’t buy. There’s plenty that Chinese yuan can’t buy, or at least plenty that it can’t buy readily and expeditiously. You can buy most things in pounds or euros, but you’d have a harder time obtaining goods and services while traveling with a suitcase full of euros than you would with a suitcase full of dollars.

Dollars are synonymous with money the world over. I use this example often and some readers don’t like it, but it illustrates the point: If you show up in Sinaloa to buy 100 kilos of cocaine and you open your car trunk to reveal vacuum-sealed Mao faces instead of Benjamin Franklins, your counterparty may “accept” the Maos, but there’s a good chance you’ll replace the Chairman in the trunk.

Treasurys are just interest-bearing dollars, and the interest is paid in more dollars. And, again, dollars are synonymous with “money” (as a concept) and the US issues them at will. The whole conversation is circular to the point of being meaningless.

Also circular is the suggestion that nations which rely on the US for security guarantees are more creditworthy than their protector. Have a look at the list of top-rated sovereigns: Some of them could be seized overnight by a hostile power absent the US military deterrent. A nation which doesn’t exist can’t make good on its financial obligations, and the permanence of many nations all around the world is underwritten, implicitly and in many cases explicitly, by US security guarantees. Jamie Dimon made the exact same point a few months back.

Outside of a major war the US loses, or a successful effort to supplant the dollar as the world’s reserve currency, the threat to America’s creditworthiness emanates entirely from within:

• If dysfunction leads to dissolution (where “dissolution” is a euphemism for some kind of civil war), all bets are off.
• If the absurdist tale of one man’s (successful) efforts to parlay his D-list celebrity status into a presidential personality cult ends up supplanting the rule of law, all bets are off.
• If one party in America’s political duopoly descends into factionalism and the winner of the intra-party rift views chaos as an end in itself, all bets are off.

Ratings agencies can only speak so loudly to those concerns, and when they do address them, it’s always in the context of fiscal planning. But references to the true nature of the problem are becoming more explicit.

As Moody’s put it, “weaknesses with regards to the quality of the country’s legislative and executive institutions” could become more relevant for America’s credit profile going forward “because the deteriorating debt affordability trend would call for a more significant and effective fiscal policy response.”