It’s no surprise that if we all ran our household budgets like the government handles its (our) money, we’d likely be living on the streets.
The federal deficit has been growing leaps and bounds since 2001, and at this point in 2025, it totals $1.051 trillion.
We’ve been on an incredible spending spree, every year racking up more expenses than our incoming revenues can support.
It’s not sustainable.
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So, is it any wonder that Moody’s just knocked down the U.S. government’s credit rating—from AAA to Aa1? Moody’s reasoning: “If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the deficit over the next decade,” adding, “The result could be a debt burden of 134% of GDP by 2035.” The agency also said that “the cost of interest payments on the debt were projected to rise from 9% of federal revenue to 30% of revenue by 2035.”
Moody’s is actually just doing what the other two major rating agencies have already done—downgrading our credit rating to reflect that this heavy debt load makes our country a bigger credit risk, and it gives the three branches of government less flexibility to come to our rescue in future economic or global crises.
The downgrade, late Friday, caused a bit of turmoil in the markets on Monday, but that didn’t last. Its bigger implication is this: It also means that our debtors are going to require a higher interest rate when we come begging for money. We’ve already seen rates on bonds and notes increasing as a result of this rating reduction. The yield on the benchmark 10-year Treasury bond rose to 4.56%. It’s since retreated a bit (4.45%) as, honestly, most buyers of Treasury bonds and notes don’t even pay attention to the credit rating.
And for you and me, that boils down to us paying higher interest rates when we want to borrow. That’s already happening, as 30-year mortgage rates hurdled past 7%.
Long term, I think we’re just going to have to live with this deficit, as Congress (and the president) aren’t in a belt-tightening mood. In fact, the president’s “one big beautiful bill” is estimated to push us further into the red. According to Congress’s Joint Committee on Taxation, “The tax pieces of the bill alone are set to cost over $3.8 trillion if enacted. That’s split between $7.7 trillion in tax cuts and $3.9 trillion in tax-specific offsets.”
I don’t know if the whole bill will pass the legislature, but I have no doubt some of it will, and we can anticipate higher deficits from the result.
What the Ratings Actually Mean
Everyone is getting into a lather over this rating change, and I agree, it’s definitely not a positive move. But it also isn’t the BIG DEAL that many are shouting.
Source: WallStreetPrep.com
Obviously, the higher the credit rating, the better, right? These ratings are supposed to be an unbiased analysis of the creditworthiness of the debt of a government or corporation. However, most folks don’t realize that the government—as well as corporations—actually pays the rating agencies for their evaluation. Now, I’m not saying that creates bias, but there are plenty of studies (such as this study) out there that do imply a certain pressure which often leads to “overly generous” ratings.
So, investors do need to take that potential bias into account when viewing ratings. The other aspect that makes me not too terribly worried about how this rating change may affect investors is past history.
In 2011, Standard and Poor’s cut the U.S. debt rating from AAA to AA+—the first-ever downgrade. That roiled the markets, pushing them down 6%. But the decline was very short-lived, and the markets continued upward.
And it looks like this latest downgrade was a very short-term blip on the market’s path.
However—while I don’t see a huge, long-lasting effect on the markets from the downgrade, I think consumers and investors have a couple of takeaways to consider:
- The prediction that interest rates would be reduced a few times this year is probably not happening. Instead, rates have been very sticky, and I think consumers planning to buy homes (7.02% rate), cars (average rate for new cars, 6.84%), and relying on their credit cards (average 21.47% rate), may have to rethink their spending habits and strategies.
- Investors may want to stay away from companies with heavy debt loads, especially variable-rate debt. In times of economic contraction, that debt load can become unbearable and can cause financial hardship and even bankruptcy. We already see that happening. In the first quarter of this year, 188 companies have already filed for bankruptcy, their highest level since 2010. So, make sure you are investing in fundamentally strong companies with healthy cash flows (more than sufficient to meet their debt obligations).
So, it’s back to business as usual.
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