Downgrading The Weekend

2025-05-19 05:47:00 ET

Summary

• After the close on Friday, Moody’s dropped a bombshell downgrade of US government debt from AAA to Aa1.
• But, does it matter? I would say 100% no. It might cause a market reaction, but again, we’ve seen this before.
• One thing to keep in mind is that even though there’s been some tariff front-running, we haven’t really seen the actual bleed-through yet.

Here are some things I think I am thinking about this weekend.

1) Moody’s Downgrades US Government Debt

After the close on Friday, Moody’s dropped a bombshell downgrade of US government debt from AAA to Aa1. It’s deja vu all over again for those of us who have been around too long. I still remember S&P downgrading the USA in 2011. I wrote about it in real-time and said how silly it was. A year later, interest rates on US government debt were a full 1% lower. I’m a very broken record on this topic, but look, this isn’t that difficult. Here are the facts:

1. The USA, like all fiat currency issuing governments, has a printing press. It cannot run out of the money it can create.
2. The USA is especially unique in this sense because not only can it print this currency, but it can tax the wealthiest private sector that has ever existed. Let’s put some figures on this. The US government generates $5 trillion of revenue every year from taxation. The next closest country is Japan, which generates $1.5T. Germany’s central government generates $550B+ per year. So the USA is 10X bigger than the country that many people cite as one of the most fiscally responsible entities in the world. The important conclusion here is that the US government isn’t special because it has a printing press. It’s special because it just so happens to be the entity that can tax the wealthiest private sector in human history. So, it has access to taxing a private sector that has $200T of total net worth. The incredible financial prowess of our private sector is what makes US government debt unique.
3. The USA doesn’t borrow in a foreign currency and cannot be forced to pay debts in something it cannot either create or tax vast amounts of.

Read the full article on Seeking Alpha

For further details see: