The fallout from Fitch Ratings’ decision to downgrade the US’s long-term foreign currency issuer default rating continues to swirl, with the Nasdaq, New York Stock Exchange and Dow Jones Industrial Average all tumbling between one and two percentage points in Wednesday trading.
Treasury Secretary Janet Yellen, who slammed Finch’s move as “arbitrary,” assured that the downgrade doesn’t change US Treasuries’ status as “the world’s preeminent, safe and liquid asset,” or the ‘fundamental strength’ of the US economy.
Analysts warned that the long-term impact of the downgrade could include increasing borrowing costs to service the nation’s mammoth $32.7 trillion national debt, which is on course to exceeding that of the next four top debtor countries (all of them G7 nations) combined.
Ticking Time Bomb
The downgrade isn’t really anything unexpected if one looks at the US economy’s fundamentals, Dr. Rodney Shakespeare, renowned economist, political commentator and author, told Sputnik.
“The problems provoking the downgrade include a) horrific, and increasing, debt levels, b) growing awareness that the derivatives upside-down pyramid [market] is a ‘weapon of financial mass destruction’…c) inflation and rising interest rates to counter inflation, d) inability to solve social and infrastructure problems, and e) loss of good permanent jobs and the rise of the ‘gig’ economy,” Shakespeare said.
The observer believes the drama surrounding the indictments against former president Donald Trump, which “could push an already-divided America into both political and social collapse,” plus the “growing awareness” of the “foreign policy disaster” in Ukraine, also help account for Fitch’s decision.
“The recognition of the aggressive movement of NATO over twenty five years and the implications of the sanctions on Russia on the global system have combined with the great global shift from a unipolar to a multipolar world [served] to shock the Fitch analysts. All the way around the world, countries are planning – somehow, to break away from the ghoulish clasp of the American dollar. The analysts are having an ‘Oh my God!’ moment in which they recognize that the situation is changing, negatively, right beneath their eyes,” Shakespeare said.
The economist doesn’t expect Washington to heed Fitch’s warning to change its monetary and fiscal policy. The warning “will, however, alert the rest of the world to the moving disaster that the USA is rapidly becoming.”
‘Housekeeping’
Senior market analyst and columnist Jim Wyckoff holds a more conservative view on the implications of the downgrade. Characterizing it as a “kind of housekeeping move based on things that have been going on for the past several years,” Wyckoff told Sputnik that he doesn’t expect “anything more significant to come out of this,” or for it to cause anything beyond a “ripple in the marketplace,” unless other major credit rating agencies follow Finch’s lead.
“I think the general market reaction has not been extreme. You are seeing a little bit keener risk aversion in the marketplace, but here’s what’s interesting: you would think that if the US had its credit rating downgraded, that that is a strike against the US economy, a strike against the US government, a strike against the confidence of the US dollar. But yet today we’re seeing the US dollar index rally to a three-week high on safe-haven buying, because of the Fitch downgrade. Now that sounds kind of confounding, but that is indeed what is the case,” the analyst said.
Behind-the-Scenes Battle Between Yellen and the Fed?
Veteran market analyst and geopolitical observer Tom Luongo has a different perspective altogether, telling Sputnik that Fitch’s downgrade was “a long time coming” amid the Biden administration’s spendthrift economic policy, and that it’s evidence of a battle between the Treasury’s money-printing machine and Jerome Powell’s Federal Reserve as the latter struggles to get a handle on inflation.
“Per Fitch’s statement, the US is facing a fiscal nightmare because of its budget deficits, proposed spending and an aggressive Federal Reserve. With the Fed Funds Rate now at 5.5 percent and…Powell expected to continue raising rates, the interest on the US will overwhelm the Federal Budget,” Luongo said.
The observer pointed out that Yellen recently announced plans to raise over $1.7 trillion in additional debt before the end of 2023. Accordingly, Fitch may have “timed this as a warning to Powell to stop raising rates and get back with the coordinated policy that was in place when Janet Yellen was in charge. This downgrade is aimed squarely at Powell and the Fed. Powell, for his part, has been resolute, saying that DC’s fiscal problems are their problems, not a matter of Fed policy.”
“This downgrade reeks of political blackmail. This is all about reversing the collapsing US dollar liquidity overseas to save a system that is well past time to be replaced,” Luongo stressed.
“Fitch gave away the real story of this downgrade by advising scrapping the debt ceiling. This was an open tell that they were acting in concert with Janet Yellen at Treasury,” he added.
‘A Good Thing’
Ultimately, Luongo believes the downgrade may increase America’s borrowing costs, putting a hamper on the Biden administration’s proposed spending, and “accelerate the fiscal crisis coming between conservatives and spendthrifts,” which is ultimately “a good thing.”
Unlike in 2011 and the S&P rating downgrade of US credit, “this time there will be big winners and big losers. The BRICS are exiting the game to start their own. The fight now is over whether the US will continue to subsidize its own destruction through cheap money and bad policy. If I’m reading Powell correctly, he’s winning that fight,” the observer summed up.