Rampant DC dysfunction made America’s credit downgrade inevitable

CNN

Analysis by Allison Morrow, CNN

New York (CNN) — For only the second time in history, America lost its perfect rating on its long-term debt — the exact thing everyone said would happen when lawmakers decided to play chicken with the full faith and credit of the United States.

Whether Fitch Ratings’ downgrade was warranted — many economists argue it was not — it is nonetheless a direct result of incessant dysfunction in Washington, especially (though not exclusively) the Republican-manufactured debt-ceiling debacle that played out this spring. And it illustrates the real-world consequences that lawmakers’ brinkmanship has on regular Americans, who could see their investments lose value and already-high borrowing rates go up.

See here: Fitch cites “a steady deterioration in standards of governance” in its report, which, perhaps appropriately, came out moments after a grand jury handed up a third round of criminal indictments against former President Donald Trump.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said in its report. “In addition, the government lacks a medium-term fiscal framework … and has a complex budgeting process.”

In other words: Republicans can’t stop cutting taxes and then holding the economy hostage with its debt-ceiling antics, and both parties refuse to make politically sensitive cuts to spending that is adding to America’s debt burden.

The message from Fitch this week, and S&P more than a decade earlier, is that the constant brinkmanship in DC is eroding trust. And eventually, that has to take a toll.

Take the debt ceiling.

The US avoided defaulting on its debt this spring, but just barely. With about two days’ worth of funds to keep the lights on, Congress managed to pass a bill that suspended the nation’s $31.4 trillion debt limit through the end of next year.

Historically, raising the debt ceiling was not controversial — the “full faith and credit” of the United States wasn’t something either party wanted to trifle with.

That’s because the entire global financial system hinges on the promise that the United States always pays its debts. That’s why the US dollar is the world’s reserve currency and the backbone of international trade. When you mess with that perfect record, you shake the foundations of the world economy.

But in 2011, congressional Republicans added debt-ceiling threats to their toolkit, demanding President Barack Obama negotiate over deficit reductions or watch the US default on its debt under his watch. The ensuing crisis took America to the edge of default, and investors around the world watched.

Within days, S&P downgraded US debt for the first time in history. Stocks plummeted, bond yields spiked and it took another six months for markets to recover.

The lesson didn’t take, at least not in Congress. We had another standoff in 2013. And another in 2021. And another in 2023.

And while lawmakers just began their August recess, a bitter funding fight awaits them next month. Our elected officials will have just a few weeks to pass a series of spending bills or else force the federal government into shutdown.

Whatever Fitch’s reasoning for downgrading when it did, it isn’t hard to see why they’re losing confidence.

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