The US economy is generating more anxiety than stability
More and more adjudicators — rating agencies are that — are being forced to admit that the US isn’t the economy that it was
On Friday Moody’s became the last of the “big three” rating agencies to downgrade the US from its AAA (best) rating to AA1. The other two, namely Fitch and S&P effected downgrades from AAA to AA1in 2023 and 2011 respectively.
What does this mean for the US economy? How the markets react will be known when they open on Monday. Technical analyses suggest that the present downgrade shouldn’t make any difference to risk-weighted capital allocation calculations because most banks treat AAA and AA1 at par. However, this is not all. The world of rating agencies is far from transparent or just. Advanced economies have always enjoyed a bigger advantage in ratings than their emerging market peers. This is a point that countries such as India have been making for some time now. The advanced economy premium was primarily premised on two things — a stable inflation and debt path for these countries and the stability of the global economic order led by the US. The twin shocks of the pandemic and the Ukraine war have destabilised the debt-GDP trajectories of many advanced countries, the US included. And Trump 2.0’s economic flip-flops have forced everybody to ask existential questions about the longevity of the current US-led economic order.
It is in this background that the last of the “big three” rating downgrades (from a perfect score) matters for the US and the world at large. It need not necessarily lead to large movements in financial markets or change the dynamics of capital flows immediately. But more and more adjudicators — rating agencies are that — are being forced to admit that the US isn’t the economy that it was. We might be entering an era where the capitalist core is generating more anxiety than stability.
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