Uh oh. Have you seen the recent news? Fitch Ratings, an organization that provides credit ratings for companies and governments around the world, has “downgraded” US debt. Instead of receiving Fitch’s highest rating of AAA, the US government’s debt is now rated as only AA+.
So, what does that mean? After everything we’ve been through the last few years, is it finally time to panic?
The short answer? No. The long answer? No. No. No. No.
The Short Answer
In reality, this is nothing new. Fitch is upset, among other things, about the recent debt ceiling shenanigans, which we wrote about here.
Actually, almost the exact same thing happened after a similar debt ceiling standoff in 2011 when S&P, a different ratings agency, downgraded US debt from AAA to AA+.
What happened? Diddly squat. The US government was subsequently still able to borrow money easily, sometimes at silly-low rates of less than 1% per year. In the 12 years since that downgrade, the US stock market has risen over 300%.
So, what does history tell us? Should we fret over this downgrade to US credit, yes or no?
The answer is clear: No.
The Long Answer
In reality, this downgrade says more about Fitch as a ratings agency than the US government’s creditworthiness. It would be as if a contemporary music critic wrote a book about how the only music worse than Beyonce’s was the Beatles. It’d probably make you think less highly of that music critic.
I agree partially with Fitch’s sentiment that the US should probably stop doing the whole thing where we hold ourselves hostage and threaten to default on our debt as a negotiating tactic. But, the fact we can do that every once in a while, and people still buy treasuries in droves—and treasuries still form the backbone of the financial system—is actually kind of a bizarre flex on how AAA-creditworthy we really are.
It’s kind of like when NBA star Dennis Rodman went to Vegas during the playoffs, got trashed, and skipped practice the next day. Then, in game 4, he ripped down 14 rebounds (that’s a lot). The Bulls went on to win the championship that year. Love it or hate it, those shenanigans are even more of a testament to how good of an athlete he was. If I have a beer past 3 PM, I can hardly get up the nerve to go for a light jog the next day.
So, here’s the long answer:
Should the US threaten to default every once in a while as an internal negotiating tactic? No. Should Dennis Rodman schedule wild Vegas trips during the NBA finals? No. Should the US credit rating be downgraded? No. Did the Bulls bench Rodman? No.
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