Moody’s recent downgrade of the U.S. credit rating created another shock in financial markets, already made nervous by the Trump administration’s erratic tariff policies.
The downgrade should come as no surprise, though. If anything, Moody’s is late in acknowledging that the federal government has no self-control when it comes to managing the nation’s debt.
The two other major credit rating agencies had already pointed this out, starting more than a decade ago. Standard & Poor’s knocked the U.S. government down a notch from its highest credit rating in 2011, as did Fitch in 2023. Moody’s now concurs: Although it’s still highly doubtful that the federal government would ever default on its debt obligations, it’s no longer inconceivable.
Moody’s said the downgrade was due to rising federal debt and mounting interest costs. When interest rates were close to nil, there were no significant repercussions to the federal government’s large annual deficits. But with the rise in interest rates over the past couple of years, higher debt just compounds how much the U.S. must pay its creditors to finance decades of fiscal irresponsibility. Debt service currently accounts for about 16% of all federal spending — the third largest slice of the federal budget, trailing only Social Security and health-care programs, such as Medicare and Medicaid.
The mounting debt load is a bipartisan creation. The federal government has not had a balanced budget in a quarter-century, with deficits piling up every year no matter which party controlled the White House or Congress. In just the past five years, the federal debt has grown by almost 45% to more than $36 trillion.
A chunk of this increase was necessary, such as the trillions of dollars in borrowed money that Washington poured into the states and gave to individuals and businesses during the COVID-19 pandemic to avoid an economic collapse. But some of it is just the same ole, same ole, of Congress and presidents wanting to give more to and expect less of American taxpayers.
This week, the House passed by a one-vote margin the so-called “one big, beautiful” budget bill pushed by President Donald Trump. It calls for more tax cuts than spending reductions and would add an estimated $3.8 trillion to the federal debt over the next decade to carry out the president’s priorities.
Although the cost could be pared down in the Senate, it will not be surprising for the final bill to wind up requiring well over $2 trillion in additional borrowing by the government.
Not that long ago, annual deficits of $1 trillion were considered horrendous. Now they might seem like a victory in fiscal restraint. No wonder the credit rating agencies believe that financing America’s debt is no longer a totally risk-free investment.
