The US inflation rate of 3.2% may please macroeconomist Edin Mujagic. “It’s the first time in four months that there’s been good news on this front, because inflation is falling again.” This is certainly good news in light of the Fed’s interest rate decision. “I immediately saw some celebration in the financial markets, because the chance of the Fed raising interest rates in December became somewhat lower with that number.”
Alarming news in the United States: Triple A situation in danger
Will there be further rise in US interest rates?
This door will remain open. But in financial markets, it’s all about assessing how open that door is. And with this inflation number, which isn’t too bad, that door will likely close completely. The markets are very happy about that.
The less good news is the creditworthiness of the United States, which is in doubt.
The United States still has the highest credit score of one of the big three, Moody’s. But there is also something called predicting the future. The outlook has been stable so far, in other words, the high AAA rating is not in jeopardy. But what Moody’s did now was to adjust its forecasts from stable to negative. This is often a pre-announcement that the highest credit score will be pulled.
This is worrying news for Washington. Partly due to rising interest costs, the sustainability of US government debt is increasingly problematic. In addition, there is very deep political polarization in the country. Basically, if Democrats and Republicans looked outside and saw that it was raining, they would still disagree about the fact that it was raining. They give each other very little.
Read also | “The decline in US credit standing is a sign of the times.”
So what exactly does Moody’s say?
They talk of the “increasing risk” that America will become weaker, and that this is “no longer offset by the country’s unique credit strength.” Then I think this is interesting. What is the country’s “unique credit strength”? Quite simply, America is the only country that can print dollars indefinitely with impunity. In theory, you should never worry about the US national debt. Because if they had to pay for everything, they could always print dollars. Moody’s now says this has long been a shield for the United States, but is no longer working well. Logical. Because if you print a lot of money to pay off debts, you will pay off your debts, but the dollars that people get will be worthless because too much has been printed.
What was the response to this report?
The markets reacted as if nothing had happened. Interestingly, Janet Yellen, Treasury Secretary, showed a sense of humor. She showed that she did not agree with Moody’s move and in fact said it was illogical. Because “Washington is fully committed to a sustainable and credible fiscal policy in the coming years.” Then I think this is great humor. Because the US Central Planning Office recently issued a report on this matter, stating that US fiscal policy is “fundamentally unsustainable”.
But the US economy is growing, isn’t that positive?
Yes, but you have to remember two things. 1. The US economy has shown very good growth, but it remains to be seen whether this growth can be maintained. 2. Even if growth continues, if your national debt increases faster than the economy grows, you will have a big problem. Because your debt expressed as a percentage is getting larger, despite this significant growth. Returning to Moody’s, shelf life is an issue. That’s why I’m surprised the markets aren’t reacting. It is true that this problem was already known, but it is an indication that the problems may worsen. Or to put it another way, it’s as if the new Ajax board will say we adjust the goal of becoming champions to prevent relegation. It’s totally a thing.
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