Last week, Moody's downgraded the U.S. credit rating from stable to negative, citing high budget deficits, deteriorating debt affordability and political polarization.
It's a little strange that they are just now realizing this, isn't it?
The problems mentioned arose long ago, primarily due to irresponsible policies during the pandemic. Maybe the monetary helicopter idea wasn't the best after all.
By pulling the economy out of the Covid-19 mess, we could be setting ourselves up for an even worse crisis in the future. The situation is becoming unsustainable.
And yet the agency maintains the country's long-term rating at AAA…Could it be that they are waiting for a miracle not to happen and the debt will not disappear, or do they simply not want to fall foul of the significant forces?
Just because you don't see the problem doesn't mean it isn't there
Investors, judging by the dollar index's lack of reaction, seem unperturbed by the news of Moody's downgrade, with demand for Treasuries rising and yields falling.
The reason for such optimism could be that the country has consistently met its obligations to creditors. But in reality, it is a myth; albeit technical, there have been defaults.
The first "de facto" U.S. default occurred in the late 18th century, when Congress announced the devaluation of "continental dollars" and then agreed to redeem its bonds at 1% of face value.
Then, 70 years later, in 1860, there was a nasty story with Greenbacks for $60 million, and in the end, the investors received 50% of what was promised. These actions can be considered as an acknowledgement of insolvency.
Then came the default of 1933. Bonds totalling $7 billion were issued to finance World War I. On paper, the collateral was gold, thus a safe haven at the time.
However, at the request of President Roosevelt, Congress passed a resolution denying U.S. holders payment in gold, devaluing the dollar by 40% compared to foreign currencies.
Interestingly, in February 1935, the Supreme Court upheld the congressional resolution as constitutional. Chief Justice Charles Evans Hughes called the resolution "amoral" but legal.
In 1979, there was already a technical default of US$122 million, albeit a very brief one. Even so, the government had to pay additional interest for the delays.
What prevents the Government from repeating history?
Although there have also been some dark episodes in the history of U.S. debt repayments, this does not mean rushing to get rid of Treasury bonds.
It is necessary to act according to the current situation
Despite the fact that the debt reached a growth rate of $2 trillion a year, and this year's budget deficit is up 23% over last year to $1.695 trillion, default is not yet on the horizon.
However, if the geopolitical situation in the world continues to deteriorate and the government continues to spend money like there is no tomorrow, risk will increase.
Eventually, US Treasuries may turn from safe assets to risky assets. At that point, it is recommended to keep an eye on the volume indicator to understand the market sentiment.
