Moody’s Credit Downgrade Signals Urgent Fiscal Warning for Washington

Ernest Hemingway’s famous phrase about going bankrupt “gradually and then suddenly” aptly captures the current trajectory of America’s fiscal health, which is steadily deteriorating and edging closer to a potential crisis.

This alarming development was underscored last Friday when Moody’s Ratings stripped the U.S. federal government of its final major Triple-A credit rating. As a result, none of the leading rating agencies now regard America’s debt as top-tier. Moody’s pointed to repeated bipartisan failures to curb the growing budget deficit, projecting it could rise to 9 percent of gross domestic product within the next decade, up from 6.4 percent last year. Historically, deficits of this magnitude have only been seen during extraordinary global upheavals such as World War II, the 2008 financial crisis, and the COVID-19 pandemic.

Despite decades of warnings about the nation’s fiscal outlook, investors have traditionally continued purchasing U.S. government debt. In 1988, with federal debt less than half today’s level relative to GDP, then-Federal Reserve Chairman Alan Greenspan cautioned that the long-term fiscal imbalance was becoming an immediate concern. Yet, investors remained confident, even after the first credit downgrade by a major agency in 2011. This time, however, the outlook appears less optimistic.

Current conditions have shifted in ways that make Greenspan’s warnings more pressing. Some investors are now reassessing their exposure to U.S. financial assets. Meanwhile, political leaders, facing narrow congressional majorities, are more inclined to pursue popular spending increases or tax cuts than to implement difficult fiscal reforms. This dynamic is expected to drive up interest rates on government debt, which in turn slows economic growth by increasing borrowing costs for consumers and businesses, and further strains government finances, creating a vicious cycle.

Rather than directly addressing the fiscal challenges, lawmakers from both parties have focused on technical accounting maneuvers. For example, recent budget proposals from the House Ways and Means Committee include tax cuts designed to expire within a decade, such as eliminating taxes on tips and overtime pay, and raising standard deductions and child tax credits. These short-term measures offer limited relief but fail to tackle the underlying budgetary issues.