Moody’s, a prestigious credit rating agency, has demoted the United States government’s credit rating from Aaa to Aa1 due to the country’s escalating national debt. This decision was announced on May 16, highlighting the inability of US lawmakers to curb annual deficits or cut back on spending, hence the mounting national debt.
In a statement, Moody’s mentioned: “With the current fiscal proposals under review, we do not foresee significant reductions in mandatory spending and deficits over multiple years. Over the coming decade, we anticipate larger deficits as government spending on entitlements increases while government revenue remains relatively stagnant.”
The downgrade is a single step in the 21-notch rating scale that Moody’s uses to assess the financial health of entities. Despite the downgrade, Moody’s remains optimistic about the long-term financial health of the United States due to its robust economy and the standing of the US dollar as the global reserve currency, implying “balanced” lending risks.
The reaction to Moody’s revised credit rating for the US sparked various responses from investors and market participants. Gabor Gurbacs, CEO and founder of Pointsville, a crypto loyalty rewards company, criticized the rating agency’s past credit assessments during financially stressful periods as unreliable, indicating that the revised outlook was overly optimistic.
On the other hand, macroeconomic investor Jim Bianco dismissed the recent Moody’s credit outlook as not truly reflecting a downgrade in the perceived creditworthiness of the US government, referring to the announcement as a “nothing burger.”
In January 2025, the US government debt exceeded $36 trillion and continues to rise, despite recent attempts by influencers like Elon Musk to reduce federal spending and control the national debt. As debt increases and investors’ confidence in US government securities dwindles, bond yields will rise, leading to higher debt service payments and further bloating the national debt. This could lead to a vicious cycle where the government has to offer higher yields to attract investors to buy government debt.
