• Investing
  • Stock
  • Economy
  • Editor’s Pick
Portfolio Performance Today
Economy

What Moody’s US Credit Downgrade Means for You

by June 4, 2025
by June 4, 2025

On May 16, Moody’s Ratings downgraded the US government’s long-term issuer and senior unsecured ratings from Aaa (the highest possible rating) to Aa1 and revised the outlook to stable from negative. The rating agency cited the likelihood of “persistent, large fiscal deficits [that] will drive the government’s debt and interest burden higher” due to deficits driven by increasing entitlement spending and plateauing tax revenues.

Moody’s, however, was late to the party. S&P Global ratings downgraded the US government’s credit rating in 2011, and Fitch Ratings issued a downgrade in 2023. Both cited similar concerns over growing budget deficits and doubts about the ability to pay them.

Unfortunately, when the US cannot keep its finances in order, American families will feel the squeeze through higher borrowing costs, higher taxes, a more aggressive tax collection regime, and a weaker dollar.

Government Debt Hurts Private Borrowers

At a basic level, the yield curve (a visual representation of how much it costs the Treasury to borrow money for different periods of time) serves as a benchmark for market interest rates, including corporate bonds and mortgage rates. Much like when a credit score downgrade results in higher personal borrowing costs, the US credit downgrade will mean higher borrowing costs to offset the increased risk of lending. These higher borrowing costs will be reflected on the yield curve and prompt private creditors to raise interest rates to firms and individuals as well.

Nobel Prize-winning economist James Buchanan noted that when private investors purchase government debt, they forgo the next-highest valued use of their capital. As Buchanan put it, spending that is funded by debt is “in effect chopping up the apple trees for firewood, thereby reducing the yield of the orchard forever.” 

Government borrowing diverts capital from more productive private sector uses (i.e. research, innovation, and/or business expansion) that could help improve the standard of living for everyday Americans.

Furthermore, the government’s growing demand for loanable funds puts upward pressure on interest rates (the price of borrowing). Lenders will demand higher returns, and individual borrowers will need to offer more competitive terms to access credit. This means higher interest rates on mortgages, credit cards, and personal loans.

Government Debt Hurts Taxpayers

As the US government faces higher borrowing costs, net interest payments (the interest the government must pay on its debt, offset by interest income) will dramatically increase. The image below comes from the AIER Explainer “Financing the Federal Government: How Government Takes & Spends Your Money”; it depicts a breakdown of how the federal government spent each dollar in FY 2024, which ended on October 1, 2024, long before the Moody’s downgrade.

Sources: “Tables B-1-B-5 and Supplemental Tables” in The Budget and Economic Outlook: 2025 to 2035. Design inspired by Heritage Foundation, National Priorities Project, and The Atlantic. Image from Wikimedia Commons.

Note that 13.5 cents of every dollar went to net interest payments. As borrowing costs increase, more spending is dedicated to net interest payments, which then crowds out funding for other federal programs. My former colleague Brooklyn Roberts and I discussed this after the Fitch Rating downgrade in August 2023, noting that cuts to transfer payments (particularly Medicaid) to state and local governments would be seen by federal policymakers as more politically viable than addressing bloated federal programs.

So far, the federal government has spent $578.7 billion on net interest payments out of the $4.16 trillion spent this fiscal year. In other words, 14 cents of every dollar this fiscal year is going to net interest payments, which is likely to increase by the end of FY 2025.

Buchanan also noted that debt-financed spending shifts tax burdens from present to future generations. While bond investors trust that their loan will be paid back with interest, future generations will bear the cost of the government spending undertaken today. 

A Declining Dollar Hurts Everyone

The credit downgrade, along with uncertainty in monetary policy, has hurt the dollar. The US Dollar Index (DXY) fell following the credit downgrade announcement and continues to decline. Analysts also note that the decline in demand for Treasury notes also led to a decline in demand for dollars.

As the demand for the dollar decreases, a sell-off of dollar assets could increase the supply of dollars in the foreign exchange market, leading to further depreciation in the dollar’s value. This depreciation is likely to lead to reduced living standards, weaker economic growth, and higher inflation.

Ultimately, policymakers in Washington are only hurting themselves. As my colleague Pete Earle aptly put it:

“The greatest threat to the soundness and utility of the US dollar, and in turn to the financial health and prosperity of American civil and commercial life, comes not from shadowy figures in faraway lands, but from unremarkable apparatchiks carrying out the edicts of US officialdom.”

As the US loses its status as the world’s reserve currency, politicians and bureaucrats in Washington have no one to blame but themselves.

Can Washington Course Correct?

Earle notes that there is still time to correct course through “economically coherent, consistently applied policies.” Ultimately, this must come from serious spending reform and (particularly) spending reduction.

My colleague Ryan Yonk and I lay out several options for spending reform in the AIER Explainer “Understanding Public Debt.” While the Department of Government Efficiency (DOGE) seemed to get off to a promising start in January, it failed to tackle the primary driver of spending growth: entitlements. Worse, members of Congress have thus far failed to make the few cuts DOGE recommended permanent. Now, DOGE Director Elon Musk is stepping down.

After the news of Musk’s DOGE exit broke, a headline from The Babylon Bee quipped “Elon Musk Leaves Job Of Making Government More Efficient For Much Easier Job Of Sending Humans To Mars.” 

Reversing course is possible, but it will demand political courage and coordination to overcome the incentives millions in the federal government have to maintain “business as usual.” Let’s hope such a transformation is still possible.

0 comment
0
FacebookTwitterPinterestEmail

previous post
The Rent IS Too High: Blame Zoning and Supply Caps, Not Rental Apps
next post
The Economic Tradeoffs of Property Tax Reform

Related Posts

Trump’s ‘Art of the Deal’ Politics Undermine America’s...

June 26, 2025

Teachers’ Unions Think They Own Your Kids 

June 26, 2025

Central Bank Independence: More Heat than Light

June 26, 2025

Central Bank Independence: More Heat than Light

June 26, 2025

Teachers Unions Think They Own Your Kids 

June 26, 2025

Trump’s “Art of the Deal” Politics Undermines America’s...

June 26, 2025

Iran, Israel and US agree that Islamic Republic...

June 26, 2025

Bernie Moreno wants Senate to call for Nobel...

June 26, 2025

Democratic congressman hurls profanity-laced message at Stephen Miller

June 26, 2025

UN’s atomic agency’s Iran policy gets mixed reviews...

June 26, 2025

Stay updated with the latest news, exclusive offers, and special promotions. Sign up now and be the first to know! As a member, you'll receive curated content, insider tips, and invitations to exclusive events. Don't miss out on being part of something special.

By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

Recent Posts

  • Trump’s ‘Art of the Deal’ Politics Undermine America’s Future

    June 26, 2025
  • Teachers’ Unions Think They Own Your Kids 

    June 26, 2025
  • Central Bank Independence: More Heat than Light

    June 26, 2025
  • Central Bank Independence: More Heat than Light

    June 26, 2025
  • Trump’s “Art of the Deal” Politics Undermines America’s Future

    June 26, 2025
  • Teachers Unions Think They Own Your Kids 

    June 26, 2025

Editors’ Picks

  • 1

    Meta executives eligible for 200% salary bonus under new pay structure

    February 21, 2025
  • 2

    Walmart earnings preview: What to expect before Thursday’s opening bell

    February 20, 2025
  • 3

    New FBI leader Kash Patel tapped to run ATF as acting director

    February 23, 2025
  • 4

    Anthropic’s newly released Claude 3.7 Sonnet can ‘think’ as long as the user wants before giving an answer

    February 25, 2025
  • 5

    Nvidia’s investment in SoundHound wasn’t all that significant after all

    March 1, 2025
  • 6

    Elon Musk says federal employees must fill out productivity reports or resign

    February 23, 2025
  • 7

    Cramer reveals a sub-sector of technology that can withstand Trump tariffs

    March 1, 2025

Categories

  • Economy (1,627)
  • Editor's Pick (168)
  • Investing (185)
  • Stock (1,052)
  • About us
  • Contact us
  • Privacy Policy
  • Terms & Conditions

Copyright © 2025 Portfolioperformancetoday.com All Rights Reserved.

Portfolio Performance Today
  • Investing
  • Stock
  • Economy
  • Editor’s Pick
Portfolio Performance Today
  • Investing
  • Stock
  • Economy
  • Editor’s Pick
Copyright © 2025 Portfolioperformancetoday.com All Rights Reserved.

Read alsox

Experts warn Iran’s nuclear double-talk designed to...

April 5, 2025

Trump-backed bill to stop ‘rogue’ judges passes...

April 10, 2025

Trump believes Israel’s strike on Iran could...

June 14, 2025