Community Before Strategy
May 29, 2025
Live from Chicago
May 29, 2025
For years, we’ve been hearing that the combination of childish governance and chronic budget deficits would eventually catch up with the United States, but the US always outran the worrywarts. That era, one in which the Treasury could borrow limitlessly and at low cost, may be ending.
“For the first time in my professional life, we’re seeing a shift, with investors looking askance at Treasury debt,” John Velis, a money manager at BNY Mellon told Politico. The spark looks to have been Moody’s downgrade of the Treasury’s credit rating, but there was no new information in the rating agency’s decision. It did, however, as Velis noted, “focus minds.”
Moody’s is one of three big ratings agencies. Their main business is assessing the risk of default — that the debtor, whether a company or a government, may miss an interest payment or repayment of principal on their loan — and their major way of communicating that risk is a letter rating, looking much like a grade. Each has a different system, but they range from AAA down to C or D (as in default). Some institutional investors are, under government regulation or internal policy, required to buy only high-rated debt. Moody, using its own idiosyncratic system, cut the United States from Aaa, the highest, to Aa1, second highest.
In its downgrade, Moody’s pointed to interest and debt burdens that are “significantly higher” than the US’s rich-country peers, while noting that the country still has exceptional strengths, like the size and dynamism of its economy. But those strengths “no longer fully counterbalance the decline in fiscal metrics.” They’re discreetly confident in the face of the political challenges of the Trump era: “Institutions and governance will not materially weaken, even if they are tested at times.”
S&P Global Ratings (formerly Standard & Poor’s) was the first of the big three ratings agencies to cut their rating on US Treasuries, back in August 2011. Curiously, über-investor Warren Buffett and former Federal Reserve chair Alan Greenspan both dismissed the move, saying the United States could never default because we borrow in dollars — many other countries don’t have the privilege of borrowing in their own currency — and we can just print them as needed.
That’s true. It would be inflationary and panic-inducing, but it still wouldn’t be a default. S&P’s reasoning for the cut fourteen years ago was much like Moody’s in mid-May: “The effectiveness, stability, and predictability of American policymaking and political challenges have weakened at a time of ongoing fiscal and economic challenges,” meaning chronic deficits and rising debt. The world of 2025 seems rather less stable and predictable than that of 2011.
Fitch, the smallest of the big three, announced its downgrade in August 2023, offering reasons very similar to S&P’s: rising debt and “a steady deterioration in standards of governance.” Countering that, Fitch noted high US scores on indexes of Political Stability and Rights, the Rule of Law, Institutional and Regulatory Quality, and Control of Corruption (caps in original). That looks quaint at a time when US tariffs on imports from China can go from 31 percent to 135 percent and back to 51 percent in just a few months on the whim of just one man, a man who happily disregards the law and who’s made a bundle on his own meme coin while using his office promoting crypto.
Fitch added that factors that could lead to another downgrade include “a marked increase in general government debt” and “a decline in the coherence and credibility of policymaking that undermines the reserve currency status of the U.S. dollar, thus diminishing the government’s financing flexibility.” We are very much there, but no critical comments yet from Fitch.
Fitch’s comment about the reserve currency status refers to the dollar’s role as the global currency, the one major commodities like oil are priced in, and the one in which countries keep their foreign reserves. (Foreign reserves are holdings that countries keep of currencies other than their own that serve as cushions in case of a foreign payments crisis. As of last year, 58 percent of those worldwide were denominated in US dollars.)
That reserve status has depended in part on the enormous size of the US economy and its financial markets; no market in the world matches the US Treasury market’s capacity to absorb billions in inflows and outflows with only the slightest ripple. But it also depends on the United States’ role as the foundation of capitalist power globally and its ultimate guarantor in a crisis.
During the 2008 financial crisis, the Fed and Treasury led a globally coordinated bailout. It’s not clear that Trump’s government would have the competence or stature to do the same today. Trump has deliberately frayed the ties among the principal capitalist states, and the US today is a source of systemic disorder, not stabilization.
Evidence of the “shift” that Velis cited can be found in the unprecedented ways in which markets panicked on Liberation Day, April 2, when Trump announced his big, not-so-beautiful tariffs. Normally in times of political or economic stress, investors from around the world plow into US assets, notably Treasury bonds. Since you need dollars to buy Treasuries, such flights to quality, as they’re called usually, push up the value of the dollar.
That didn’t happen after Liberation Day: the dollar fell, a sign that investors were dumping US assets rather than buying them. George Saravelos, a Deutsche Bank currency analyst (funny, since Deutsche was one of the few major banks to lend to Trump over the years, on often questionably generous terms), diagnosed a “dramatic regime change in markets” and an increasingly likely “confidence crisis” in the dollar. That panic has ebbed, but it does feel like something has changed.
In its downgrade note, Moody’s said, “US institutions and governance will not materially weaken, even if they are tested at times.” Hope dies last.
Republicans now thoroughly control the federal budget, but math makes budget balancing very hard for them. They’re committed to big tax cuts. Tariffs will offset that some, but not by much, so increasing revenue is out.
The spending side isn’t so easy either, if you’ve ruled out cuts to the Pentagon. The budget is basically divided into three big parts: mandatory, discretionary, and interest payments. Mandatory spending is for programs that Congress doesn’t have to authorize afresh every fiscal year — they’re on autopilot from year to year unless Congress overhauls them.
The bulk of mandatory spending is accounted for by “entitlement programs,” notably Social Security and Medicare, and Medicaid. The term, which has acquired an unfortunate aura of moral disapproval, reflects the fact that if you qualify for the benefits, they’re yours — you’re “entitled” to them, without having to jump through hoops (though Medicaid, since it’s mostly for poor people, has some hoops and will get more).
Discretionary spending, by contrast, has to be authorized at a level set by Congress every year; this includes everything from education and the military (which accounts for almost half of it) to the environment (which accounts for very little of it).
Serious cuts to Social Security and Medicare are, for now, politically impossible, so that leaves little more than Medicaid and civilian discretionary spending to chop. You could cut both categories to zero and the budget still wouldn’t balance.
To the Right, the problem is out-of-control spending. Measured as a share of GDP, spending has risen, mostly because of Medicare and Medicaid, thanks to an aging population and an insane health care financing system, along with some help from interest payments. Social Security’s share is up only mildly.
Surprisingly, the military spending share of GDP has fallen by more than two-thirds since 1962 and half since 1986, the peak of the Reagan-era buildup. It’s still way too high, and if Trump has his way, which he usually does, it will climb. DOGE-style cuts to the Weather Service and scientific research are immensely damaging but save only trivial amounts of money.
One could narrow, or even close, the budget gap with an approach that’s forbidden in mainstream discourse: raising taxes. As a share of GDP, federal revenues in 2024, 17.1 percent, were almost exactly what they were in 1962 even as the spending share has risen from 18.2 percent to 23.4 percent. Restoring corporate tax rates, which are at near-record lows, to the levels of the early 1960s and restoring the income tax structure of the Clinton years — hardly radical moves — would reduce the deficit by nearly a third. Cut the military budget in half, admittedly a more radical move, and you’d reduce it by well over half.
Some on the Left argue that debt and deficits are nothing to worry about, or are even healthy stimuli, and only spoilsport “austerians” think they matter. On the second point, looking at eighteen major countries, on average, high-debt and -deficit countries are more unequal and have higher poverty rates than low-debt/low-deficit countries. The Nordic social democracies have small public debts and deficits, countering the belief that deficit spending is somehow egalitarian.
On the worry point, yes, the US Treasury has enjoyed tremendous freedom to borrow, but that seems a privilege not worth testing. Markets can turn on a dime, and manias can become panics almost overnight. There’s always the option of just printing the money, an idea modern monetary theorists say they are unfairly accused of. Trump himself has endorsed the printing approach several times, first in 2016 and again in his first presidency. Since we just went through a disastrous inflation, money printing, which can be seriously inflationary, doesn’t seem like a live option.
More extreme would be some kind of default. The idea of the Treasury not keeping up on its debt seems too extreme for Trump, but he does have a casual attitude toward default and bankruptcy. As he said in 2016 of his debt-driven business strategy, when you run into trouble, just negotiate.
And what does he mean by negotiate? “Hey, guess what? The economy just crashed. I’m gonna give you back half.” Trump’s advisors have talked about forcing foreign holders of Treasury bonds to exchange them for one-hundred-year bonds at low-interest rates or pay “taxes” on their interest payments, either of which would be a default — though this sort of thing is now supposedly off the table, which is good, because it would blow up the world’s financial markets, and not to the benefit of the global working class.
Aside from worrying about a market panic about the US suddenly being unable to borrow, or being forced to pay very high interest rates, the share of the budget going to service the Treasury’s debt has been rising and will only rise further. Last year, an eighth of federal spending went to interest payments, the highest in twenty-five years. That’s 43 percent more than we spent on Medicaid and 238 percent what we spent on income security. We’d rather borrow money from rich people and pay them interest than tax them.
Of course, Trump’s One Big Beautiful Bill Act (OBBA) will swell the deficit. Spending cuts in the bill, around 80 percent of them from Medicaid and food stamps (now known as the Supplemental Nutrition Assistance Program, or SNAP), will be damaging to their beneficiaries — 10–14 million people could lose Medicaid, and 11 million could see cuts to food benefits — but only very partially offset the tax cuts. Overall, the Penn Wharton budget model estimates that the poorest 20 percent of Americans will take a 15 percent hit to income in 2026, while the top 0.1 percent would gain 3 percent, based on the version of the OBBBA passed by the House. Penn Wharton adds a cheerful note: the act could increase GDP growth and capital accumulation because “cuts to Medicaid and SNAP” will force people to “work longer hours and increase precautionary savings.”
Sadly, loss of medical and food benefits isn’t the sort of thing that upsets bond traders or ratings agencies. But chaotic governance and endless borrowing can, and we’ve got plenty of that. Trump, who bragged in that 2016 interview that “nobody knows debt better than me. I’ve made a fortune by using debt,” may find that running the US government is more challenging than running some casinos into the ground and making off with the loot.
Trump promised in 2016 that “we’re gonna win so much, you may even get tired of winning.” It’s hard to see the winning in ratings downgrades, deep budget cuts, and potential fiscal crises.
Great Job Doug Henwood & the Team @ Jacobin Source link for sharing this story.
