The United States’ Credit Rating Takes a Hit

Happy Monday! Consider this story of an attack in Montana your annual warning that, although they look adorable, otters are actually quite evil.

Quick Hits: Today’s Top Stories 

• A group of eleven Russian and Chinese naval ships reportedly patrolled in international waters near Alaska last week, prompting four U.S. destroyers and P-8 Poseidon aircraft to monitor the vessels. U.S. Northern Command said the patrol “remained in international waters and was not considered a threat,” but the incursion is believed to be the largest of its kind to approach the American homeland. The move comes after Russian and Chinese ships patrolled near Alaska’s Aleutian Islands in September, briefly venturing into U.S. waters and leaving after a warning from a U.S. Coast Guard ship.
• The deadline set by a coalition of West African countries for the junta in Niger to step down and release the nation’s overthrown president passed over the weekend. The Economic Community of West African States (ECOWAS) told the coup leaders they had a week to back off or face a potential military intervention, and the military leaders of the coalition agreed to an intervention plan at a summit last week. That said, political support for such an effort appears to be dwindling in neighboring Nigeria, as members of the Nigerian Senate urge more diplomatic efforts. Meanwhile, Niger’s junta broke off security cooperation with France, which has about 1,500 troops stationed in Niger for counterterrorism purposes.
• Representatives from 40 countries (not including Russia) met in Saudi Arabia over the weekend for a summit about a peace framework for the war in Ukraine, but came away making little tangible progress. Ukrainian President Volodymyr Zelensky presented his 10-point “peace formula” which received support from allied countries, but Chinese diplomats maintained a ceasefire ought to come before any peace talks move forward. Meanwhile, Ukrainian sea drones struck a Russian naval ship and an oil tanker last week in the Black Sea, putting Russian exports along the sea route at risk. Republican presidential candidate Chris Christie also made a surprise visit to Ukraine on Friday, meeting with Zelensky and calling for more expedited military aid to the country. 
• Russian opposition leader Alexei Navalny was sentenced on Friday to an additional 19 years in prison on several charges related to fomenting “extremist activity.” Navalny, a longtime critic of Vladimir Putin, was arrested in 2021 after returning to Russia following his attempted poisoning by Russian agents, and he is currently serving a nine-year sentence over fraud charges.
• A Pakistani court sentenced the country’s former prime minister, Imran Khan, to three years in jail over corruption charges that Khan maintains are the product of political bias against him. Pakistan’s military has cracked down on Khan and his supporters in recent months, and if the court’s decision holds, Khan would be barred from holding office for five years, taking him out of contention in the country’s upcoming elections this fall. Government officials also announced this weekend that elections will likely be delayed as new constituency maps are drawn following a new census.
• Saudi Arabia and Russia both announced they plan to extend their cuts in oil production through September—the countries will slow production by 1 million and 300,000 barrels per day, respectively. The move will likely push gas prices higher—the national average for a gallon of gas reached an 8-month high in July, according to AAA.
• The Bureau of Labor Statistics reported Friday that U.S. employers added 187,000 jobs in July—up from 185,000 in June, but still below economists’ expectations. The unemployment rate fell slightly from 3.6 percent to 3.5 percent as the labor force participation rate held steady at 62.6 percent. Average hourly earnings—a measure the Federal Reserve is watching closely in its fight against inflation—rose 0.4 percent month-over-month in July, and 4.4 percent year-over-year. Those figures were the same in June.
• Special Counsel Jack Smith requested the judge overseeing his case against Donald Trump’s efforts to overturn the 2020 election issue a protective order preventing the former president from publicly disclosing evidence uncovered in his investigation—including personally identifying information. Smith’s motion argued that “if the defendant were to begin issuing public posts using details—or, for example, grand jury transcripts, obtained in discovery here, it could have a chilling effect on witnesses.” He cited a Truth Social post Trump made last Friday that said, “IF YOU GO AFTER ME, I’M COMING AFTER YOU!”
• The Food and Drug Administration on Friday approved the first pill to treat postpartum depression. The pharmaceutical company Sage Therapeutics said in a statement that it  expects to begin selling the drug—zuranolone, (brand name Zurzuvae)—in the fall, following review by the Drug Enforcement Administration. Clinical studies demonstrated that women who took the pill showed fewer signs of depression after four to six weeks following a two-week, daily course of the drug.
• Ron DeSantis over the weekend offered his strongest rebuke yet of claims that the 2020 election was stolen. “It was not an election that was conducted the way I think we’d want to, but that’s different than saying Maduro stole votes or something like that, and I think those theories proved to be unsubstantiated,” DeSantis said after a campaign stop in Iowa on Friday. “All those theories that were put out did not prove to be true.” The statement came after Robert Bigelow—a hotel chain owner and one of DeSantis’ top donors—said he wouldn’t donate more money to the campaign until DeSantis moderated his campaign approach.

The U.S. Credit Score Takes a Hit

At 5:13 pm on Tuesday, as the world’s eyes were focused on the federal courtroom in Washington, D.C. where former President Donald Trump was being indicted for the third time this year, the analysts at Fitch Ratings—one of three major credit rating firms in the U.S.—dropped a bombshell of their own: “Fitch Ratings has downgraded the United States of America’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘AA+’ from ‘AAA’.”

While the historic—but not unprecedented—move brings into focus the fiscal and budgetary challenges facing the U.S. in the years to come, it’s not clear how much it will affect markets long term—or whether it will spur any newfound austerity from lawmakers. Following the hit to the country’s credit, politicians on both sides of the aisle retreated to their corners to point fingers at the other side for their fiscal irresponsibility. 

Fitch’s job—along with Moody’s and Standard and Poor’s—is essentially to give countries a credit score. “They rate government debt and then make an assessment of the ability of governments to meet their financial commitments,” says Romina Boccia, director of budget and entitlement policy at the libertarian Cato Institute. 

In a statement explaining its surprise decision, Fitch pointed to both political and economic problems. The downgrade reflects “expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance,” the firm wrote. That predicted “fiscal deterioration,” they said, was in part due to lawmakers’ brinkmanship over the debt limit. Although the Biden administration and House Republicans were eventually able to cobble together a deal raising the debt ceiling in June, Fitch’s analysts argued the “repeated debt-limit political standoffs and last-minute resolutions have eroded confidence” in the United States’ ability to make good on its obligations. Fitch also took issue with Congress’ continued refusal to reform the massive entitlement programs, like Social Security and Medicare, that are routinely the biggest line-items in the government budget. 

Kicking the fiscal can down the road is creating serious economic problems. The debt—now more than  $32 trillion and counting—is accruing interest that will continue to eat away at government revenues, a phenomenon exacerbated by the Federal Reserve’s recent rate-hike campaign to cool inflation. The U.S. debt-to-GDP ratio now stands at nearly 113 percent, and as Fitch points out, that figure is more than two-and-a-half times larger than the median debt-to-GDP ratio for other countries with AAA and AA+ ratings—something the U.S. can get away with simply by being the world’s largest economy. “The United States plays a unique role in global markets as a safe haven and a reliable source of collateral, as a reserve currency, and as the preeminent global currency for lots of major financial transactions,” Boccia says. “There isn’t really a suitable competitor to the U.S. dollar and to Treasury bonds to fulfill those global exchange and reserve roles.”

Fitch isn’t the first of the “big three” to lower the U.S. credit rating. In 2011, after Congress had a (separate) knock-down, drag-out fight over raising the debt ceiling, S&P analysts docked the U.S. score to AA+ for the first time in history. The market tanked, with the S&P 500 falling 6.5 percent on the first day of trading after the downgrade. It took six months for the market to recover. 

This time, the market’s reaction has not been nearly so stark. The S&P 500 slipped by 1.38 percent Wednesday and the Dow Jones lost 1 percent. The major indices notched losses on Thursday as well, but all less than a half-percent overall. Bond yields—the interest on the bond which can indicate what investors feel is the value of the bonds themselves—were up last week, suggesting investors lost a bit of confidence in Treasury notes.

That said, if you hold a Treasury bond, you don’t have to freak out just yet: Fitch’s AA+ rating still suggests “expectations of very low default risk.” With the downgrade, we join our neighbor to the north, Canada, which Fitch rates AA+, as well as Austria, Finland, and New Zealand, which, like us, are also rated AA+ by S&P.

The market likely didn’t tank last week following the credit ding because a) Fitch had signaled such a move was being considered and b) the conditions Fitch described were basically priced-in already—Congress’ dysfunction is no secret. “[The downgrade] doesn’t have a big impact because it isn’t based on anything that other people can’t already see,” Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, tells TMD. 

We wish we could tell you lawmakers reacted soberly to the news, with self-reflection and plans to change their behavior moving forward—but that would be lying. GOP Rep. Jason Smith—chair of the House Ways and Means Committee—blamed “President Biden’s brinkmanship” and “the $10 trillion in new spending he and Washington Democrats passed over the past two years.” White House press secretary Karine Jean-Pierre, meanwhile, argued it was “extremism” by Republican officials—from “cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations”—that led Fitch to make the move.

Treasury Secretary Janet Yellen, meanwhile, didn’t even seem to think there’s a problem, disagreeing with Fitch’s decision while labeling it “arbitrary” and out-of-date. “Fitch’s decision does not change what Americans, investors, and people all around the world already know,” she said in a statement. “That Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.”

With appropriations season getting underway in Congress, members could theoretically heed the wake-up call if they wanted to, cutting spending in a bipartisan and orderly manner. But as Price reported last month, no one should be holding their breath waiting for that to happen. Some lawmakers are already straining against budget caps set in the June debt ceiling agreement, while others are threatening to stonewall funding bills that even get close to those limits. Continuing resolutions keeping the government funded at current levels are always an option—as are shutdowns, which may serve only to reinforce Fitch’s point. 

For now, however, the United States can still hold its head high knowing at least one agency still has its back. “Moody’s still has the United States at AAA, so there’s some disagreement between the rating agencies for how to rate the United States,” Boccia tells TMD. “There might be larger repercussions if Moody’s makes the choice to downgrade the United States in the future.”

Worth Your Time 

• A jury may or may not find beyond a reasonable doubt that Trump’s effort to overturn the 2020 election violated portions of the U.S. legal code, but that’s not what concerns Ramesh Ponnuru most. “Whether [the indictment] makes a strong legal case that will or should result in criminal convictions is, reasonably, the main debate it has sparked,” he writes for the Washington Post. “What it should make clear is that our existing methods of dealing with presidential misconduct are inadequate. What was most wrong and dangerous in Trump’s course of conduct was not that it may have run afoul of some federal statutes. It is that he attempted to subvert the constitutional order—a point that he helpfully underscored in December by suggesting that we should terminate the Constitution to reinstate him. The Constitution has a remedy for this kind of high crime: impeachment. It’s a remedy that Congress can apply even if some of the elements of a statutory crime cannot be proved beyond a reasonable doubt in court.”
• For the Wall Street Journal, Drew Hinshaw, Benoit Faucon, and Joe Parkinson report on the United States’ response to last month’s coup in Niger—and how it may have provided Russia a crucial geopolitical opening. “The coup, if successful, could lead Russia to pick up some of America’s most important drone bases, used to fly missions across the Sahara between Libya and Nigeria,” they write. “This outcome wasn’t predestined. A week of missteps and communication breakdowns pushed the vast nation of Niger toward Russia. … Washington, caught without key personnel in its Africa posts, failed to anticipate what is now the seventh coup in the region since 2020—not including a failed attempt in Niger two years ago. While [President Mohamed] Bazoum sat in his safe room calling for help, America and its allies struggled to react as the conflict escalated into threats of war between Russian-backed countries and West Africa’s biggest military, Nigeria. The U.S. has spent more than $500 million arming and equipping Niger’s military. Yet the country’s special forces, trained for nearly every counterterrorism eventuality, had no answer for Sunday’s coup—West Africa’s most enduring security threat. The forces were left chatting over WhatsApp groups over whether to intervene.” 

Presented Without Comment

USA Today: Donald Trump’s Lawyer Claims Efforts to Overturn 2020 Election Were Only ‘Aspirational,’ Not Criminal

Also Presented Without Comment

New York Post: Zoom Tells Employees to Return to Office for Work

Toeing the Company Line

• In the newsletters: The Dispatch Politics team assessed Ron DeSantis’ campaign reset, Price detailed (🔒) the kids’ online safety and privacy bills in the Senate, Nick argued in favor (🔒) of Trump’s January 6 trial being televised, Jonah explored what it means to be a good man, and Chris debuted (🔒) his 2024 Senate race ratings.
• On the podcasts: Adaam broke down the attempted judicial overhaul in Israel with Haviv Rettig Gur while Jonah ticked through the problems with climate doomerism. 
• On the site over the weekend: Luis outlined the promethean roots of Oppenheimer and Molly Reynolds reviewed a new book defending the role of Congress—despite all its faults—in policy-making. 
• On the site today: Drucker unpacks Trump voters’ hatred of the entire political system and Audrey B. explains the conflict over the country’s first religious charter school.

Let Us Know

How great is your concern about Fitch’s downgrade? What will it take for our political leaders to get serious about debt and deficits?