Let’s dispense with a few obvious points up front.

From a pseudo-philosophical perspective, it doesn’t make any sense to rate the United States lower than nations which i) don’t even print a reserve currency, let alone the reserve currency, ii) aren’t monetary sovereigns and/or iii) depend in some way, shape or form on the US military to defend their territorial sovereignty. That covers every top-rated country and territory in the world with the possible exception of Singapore.

Further, most investors who matter — the foreign official sector, the institutional crowd and so on — have to hold some sort of US debt, whether it’s bills, notes or bonds. Sometimes “have to” is figurative, sometimes it’s literal, but either way, you can’t just up and declare, “Starting today, we don’t want anything to do with US Treasurys for any reason, ever.” That’s not going to work. I mean, I suppose it’s possible, but it’s a little like saying, “Never again will I drink regular water.” Can you keep that promise? Yes. But there are times when it’ll be really, really inconvenient.

Moreover, from a systemic perspective, US government paper is the collateral that makes the world spin. As a practical matter, a downgrade of that collateral almost has to be considered a purely symbolic gesture, because if not — i.e., if everyone’s supposed to adopt a quantitatively and qualitatively different approach to US government obligations overnight — then there’s going to be a lot of friction, to put it mildly.

Finally, fiscal fundamentals simply don’t matter for the US as long as the dollar’s more or less unchallenged as the reserve currency. There’s a good argument to be made that the Trump administration’s currently gambling the exorbitant privilege on a quixotic attempt to rewrite the rules of global trade. Democratic backsliding at home doesn’t help. But until that privilege is well and truly squandered — which’ll require the emergence of viable dollar alternative and, just as importantly, the infrastructure to facilitate the efficient use of that alternative at scale — pretending the US is less creditworthy than, say, Denmark is absurd on its face. (Do you want any kroner? Would you even know kroner if you saw it?)

So, if the question’s whether it made sense for Moody’s to finally take the plunge and downgrade the US on Friday evening, the answer’s a hard “no.” It didn’t make any sense in 2011 when S&P did it, it didn’t make any sense in 2023 when Fitch did it and it doesn’t make sense now.

However — i.e., with all of that said — the US absolutely deserves the downgrade. America’s experiencing a deterioration in governance, a crisis of confidence in the nation’s institutions, a degradation of the rule of law and, worst of all, a dissolution of the social fabric. Legislative gridlock is a symptom and a cause of those larger societal ailments.

Naturally, Moody’s focused on the debt and red ink. “Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” the agency said Friday evening, in the ratings rationale. “Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat” which points to “large fiscal deficits driv[ing] the government’s debt and interest burden higher.”

Again, all of that’s irrelevant if the country doesn’t reverse what I’ve characterized as a multi-faceted credibility crisis. That crisis worsened materially over the past four months. Moody’s said it’s confident that America’s “institutional arrangements” including “the constitutional separation of powers” and “an independent Federal Reserve” will “remain strong and resilient,” but the agency did allude to “tests” of US governance. “We assume,” the rationale went on, that “respect for the rule of law will remain broadly unchanged.” (Here’s hoping!)

The ratings action came at an inopportune time. Republicans attempting to cram Donald Trump’s “big beautiful” tax cut extension through Congress ran into a roadblock on Friday when some of their hawkish colleagues refused to advance the bill on debt and deficit concerns. The downgrade won’t help.

As for markets, everyone knew this was coming. Moody’s changed America’s outlook to Negative in November of 2023. So, this was just a matter of time. As I put it while covering that outlook cut, “To the extent rule of law and institutional credibility are prerequisites for a top credit rating, America doesn’t deserve such a rating.” Now, it doesn’t have one.