Objective look at how the US Treasury bonds affect your day to day
Colllin Plume: 8-17-2023
For the first time in a decade, US Treasury bonds were downgraded from AAA to AA+ on Wednesday by Fitch Ratings, joining larger rival Standard & Poor (S&P). It didn’t downgrade the Dollar only because it is the world’s leading reserve currency.
Man economists and the government downplayed the downgrade, claiming it doesn’t really do anything. The Dollar remains the most desired currency.
They are correct in part. The dollar accounts for 60% of official reserves around the world. According to S&P, that gives the U.S. a “license to be irresponsible,”
After the downgrade, the U.S. ranks lower than Australia, Canada, and some European countries, according to Fitch.
The question is, will this really affect us? The answer is yes. There are two broad economic effects.
Higher Borrowing Cost
When a country’s creditworthiness is questioned, investors may demand higher interest rates on government bonds to compensate for the increased risk, making it more expensive for the US to finance its debt
Erode Investor Confidence
This loss of confidence can lead to reduced foreign investment and decreased overall economic activity. The currency’s value would decline as investors react to the downgrade by selling off dollar assets. Exports become more expensive as the dollar weakens.
These two, however, will not necessarily be felt right away by ordinary investors like us. That’s why many experts are insisting the downgrade is insignificant. Many insist that when we were downgraded in 2011, nothing special happened.
Yes, nothing special happened RIGHT AWAY. The effect is long-term. That is what makes it easy to dismiss.
Against A Larger Global Movement
Credit ratings like this are pinned on a country’s ability to pay off its growing debt. For years, the US has been spending more than we are earning. That forces us to make monthly payments so that we don’t default. One advantage is that we are the world’s number one reserve currency. Countries won’t let go of their dollars overnight. They have a lot of them. The chances of these major world powers sinking the value of their investment are zero.
However, this downgrade is happening with different global economic conditions than in 2011. Other countries have strengthened their economies and formed alliances to trade directly without needing the US dollar. This has been unfolding over the last decade. When the US sanctioned Russia, it highlighted a threat no country wants. Sanctions can happen to nearly anyone.
That is reason enough for them to move away from the dollar.
Fitch’s rating emphasized that, more than anything, the downgrade was brought on by the US using its economic power for political gains. It also stressed that the only reason the US Dollar has not been downgraded is its use. Once we lose that dominance, Fitch will downgrade the US dollar too.
This downgrade is a heavy weight added to the already heavy load piling up against the US and our dollar, a load that wasn’t as heavy back in 2011. That’s why it is important.
It is astounding that many are still brushing it aside like it’s not a real problem. Sure, it’s not a real problem in the short term, which seems to be all these supposed experts are capable of looking at.
The long-term is what could take us down.
