The ongoing concerns surrounding excessive government spending and rising national debt are valid. However, there are questions regarding the credibility of credit rating agency Moody’s, which has recently downgraded the federal government bonds from their previous AAA status.
This is the same agency that awarded top credit ratings to subprime mortgage-backed securities right before the onset of the most significant financial crisis since the Great Depression, resulting in a staggering loss of wealth for investors.
A reminder from the National Bureau of Economic Research highlights Moody’s part in that economic collapse:
“The credit crisis of 2008-9 was in many ways a credit rating crisis. Structured finance products, such as mortgage-backed securities, accounted for over $11 trillion dollars of outstanding U.S. debt… More than half of the securities rated by Moody’s carried the highest possible credit rating that is typically reserved for securities deemed to be nearly riskless. In 2007 and 2008, the creditworthiness of structured finance securities deteriorated dramatically: 36,346 Moody’s-rated tranches were downgraded, and nearly one third of the downgraded tranches bore the AAA rating.”
This situation is particularly ironic, considering Moody’s consented to pay a hefty $864 million penalty in 2017 for its role in maintaining flawed ratings that contributed to the crisis. The question remains: how can Moody’s assess the creditworthiness of others credibly?
The current scenario raises further skepticism about Moody’s qualifications. One might liken it to hiring an unqualified, comedic character as a financial adviser.
Beyond its questionable record, Moody’s appears to exhibit substantial political bias. The largest budget deficit to date can be attributed to President Joe Biden’s significant spending initiatives, which have led to inflationary pressures affecting the value of existing government bonds. Yet, no credit downgrade occurred during Biden’s administration.
In contrast, under the presidency of Donald Trump, the mood has shifted dramatically, with some indicating a looming financial crisis. The chief economist at Moody’s has frequently critiqued supply-side tax cuts while advocating for increased government spending as a form of economic stimulus.
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What Moody’s and similar rating agencies fail to comprehend is that tax cuts, like those implemented by Ronald Reagan in 1981 and Trump’s tax reform in 2017, can indeed foster economic growth—ultimately reducing the national debt as a percentage of the country’s overall wealth. A healthy labor market means fewer individuals reliant on welfare, contributing to a decline in government expenditure. If growth can reach 3%, as aimed by President Trump, the debt burden will begin to diminish.
It’s essential to remember that U.S. Treasury bonds are backed by the full faith and credit of the U.S. government, akin to a reliable guarantee for repayment. Yes, Washington faces a spending dilemma, yet the situation is far from that of a failed state like Zimbabwe.
The timing of Moody’s downgrade raises eyebrows. Could it be mere coincidence that this announcement coincided with Congressional votes regarding the Trump tax cut?
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In recent months, President Trump has garnered commitments totaling at least $1 trillion in new investment capital destined for the U.S. If the nation were truly on the brink of default, why would investors be flocking to its shores?
It may be possible that investors possess insights into the economy that Moody’s lacks. The principles of Trumponomics could be beneficial for the American economy and for those who invest within it.
Stephen Moore is a co-founder of Unleash Prosperity and a former Trump senior economic advisor.
