The U.S. Economy Just Got DOWNGRADED

For the first time in more than a decade, the nation's long-term credit rating has been lowered. America's dominant position is now under stress. A leading credit rating agency has downgraded the U.S. The name of the agency is Fitch. And it believes that the U.S. is not as trustworthy as it used to be. Banks collapsing, homelessness rising, and high interest rates are all signs that the United States is in a downward spiral. In recent months, it's not uncommon to hear about financial institutions going bankrupt. The most significant news is that America's credit rating has been downgraded. This means tough times are ahead for the American economy. That's why we will delve into why this downgrade happened, how it affects all Americans, and what you can do to protect yourself from its repercussions. Before I get into the details, please like and subscribe to this channel if you'd like to stay updated on topics like this. Credit rating agency Fitch has just downgraded the United States. This is so rare that it has only happened twice in U.S. history. The last time was in 2011, and it was a major issue. Now, only nine countries worldwide have a perfect AAA credit rating, but the United States is no longer one of them. Fitch Ratings Inc. is an American credit rating agency and is one of the big three credit rating agencies, along with Moody's and Standard and Poors. Fitch Ratings downgraded the U.S. debt rating from a perfect AAA to a double A+. The effects are already being felt. The three major indices dropped mid-morning. Global stocks also fell on Wednesday, resulting in the stock market losing 7% in a single day. Which is crazy when you consider that under normal conditions, the market is expected to rise between 8 to 10% in a year, and we just lost 7% in one day. But the question is, what did the United States do to deserve this downgrade? Well, Fitch cited several reasons, but the most significant one was due to debt and because, according to them, the United States is no longer as reliable as it used to be. Fitch believes that U.S. standards have been declining for the past 20 years. And this is what they stated in their official statement explaining why they took this action. There has been a steady erosion of governance standards over the past 20 years, including fiscal and debt issues. Despite the June bipartisan agreement to suspend the debt ceiling until January 2025, repeated political standoffs over the debt ceiling and last-minute resolutions have eroded confidence in fiscal management. To better understand this and explain it in simple terms, imagine this credit rating as a report card for the whole world, except instead of students, we have countries. Each country has its own report card or credit rating, and its strength is measured by how well the government manages its affairs and the strength of its economy. The better the government, the higher the rating. However, instead of letters from A to F as in schools, this is a bit more complicated. Here's the breakdown of all possible ratings, starting with D, then C, double C, triple C, and so on, with the highest rating being triple A. The United States used to have this rating, but it has recently been downgraded to double A, which is still considered quite good because it's an investment-grade rating. However, the U.S. is now three ratings away from being classified as speculative grade, which is definitely not good for the country's economy. But why is this so important? You must understand that all of this revolves around money. The United States has been seen as a beacon of safety where other countries deposit their money because it has shown itself to be a country with political and economic stability. Specifically, the way it works is that countries buy our government treasures or bonds. Other countries have invested approximately 7.6 trillion dollars in bonds, with Japan, China, and the United Kingdom being the largest investors. So this credit rating is like a country's resume to the world. It's a declaration to the rest of the world that the United States has never defaulted on its debt and has always paid its investors the interest they are owed. So, if the United States has never defaulted on its debt, why was it downgraded? Well, there are three main reasons why this happened, according to Fitch. They say that this downgrade didn't happen overnight. America's position has been gradually deteriorating. And in general, there are three issues. The first is the erosion of governance. Now, the erosion of governance specifically refers to something called the debt ceiling, which the government has to raise to approve increased spending. The debt ceiling is extremely important not only for the United States but also for the rest of the world. Because part of that budget includes interest payments on the bonds that other countries hold with us. Unfortunately, the United States likes to wait until the last possible second to raise the debt ceiling and approve more spending. To the rest of the world, this shows complete and utter disregard not only for US citizens and government workers but also for international investors and bondholders who expect to be paid on time. Imagine being an investor in dividend stocks, expecting to get paid. But instead, you see the board of directors engaging in a fistfight, arguing about how they are spending too much money on dividends. You know that the real reason they're fighting is because they want to get their bonuses first. And if you saw that, you'd be very angry. And in some cases, you might even worry that you won't get paid on time. That's an example of governance erosion. Of course, the Secretary of the Treasury disagrees with this assessment. The second and third reasons go hand in hand, increasing government deficits and high levels of debt. If you look at the historical level of US debt, you'll see that the country now owes over 32 trillion dollars. And the debt continues to grow at an unsustainable rate, especially when considering interest rates. That's because higher interest rates affect not only consumers' ability to borrow money, making it more expensive for us, but also the country as a whole. The way we really pay off our debt is by taking a credit card and using it to pay off all our other credit cards. That's the easiest analogy to understand. And that's why we've never defaulted on our debt. Because we can simply borrow more money. And we can do it without affecting inflation too much. Because we also have the ability to export excess US dollars to other countries. Because they need dollars to buy their energy and their oil, also known as the petrodollar. And it needs to remain the world's reserve currency. And part of that means getting good credit ratings. But the problem is that when interest rates are high, as they are now, more of that money goes toward higher interest payments, increasing our debt. Which only perpetuates this endless cycle of needing to borrow money. That's the real reason for the downgrade. But now the question is, how does this really affect consumers and investors? Objectively speaking, the good news is that this downgrade is a very small one, from AAA to AA. Leaving the United States as one of the safest countries in the world to invest your money. So, in the future, if the United States takes economic measures like raising taxes, they could fix the situation and return to a AAA credit rating. But because it's politically unpopular to do so, the United States generally resorts to simply printing more money. Because that's much easier. But it also contributes to higher inflation, and of course, higher debt. However, if higher taxes become slightly more likely in the future, another side effect of all this is that it increases the cost for the country to borrow money. When the United States wants to borrow money, it creates new bonds. The interest rates on those bonds, or yields, are linked to federal funds rates. This means that when a country's risk increases, as it just did with the United States, the country has to compensate investors by paying a higher interest rate because they are theoretically taking on more risk. So yes, on paper it seems that it now costs the government a bit more to borrow more money. But despite this downgrade, no one really believes that the United States will default on its debt, and not pay its bondholders worldwide just because a credit rating agency said so. Another direct negative effect that we're all feeling right now is the volatility in the stock market. On Wednesday, August 3rd, it dropped 7%. So if you want to avoid this news affecting you, the best thing you could do is refrain from buying stocks for the time being, at least until the market stabilizes, and there is no longer fear among investors. Will this be the beginning of the decline of the United States? Don't forget to subscribe if you like this type of content. See you next time.