Today, one of the major rating agencies downgraded the United States of America as a debtor, from AAA to AA+. This is the second major downgrade of US debt. As an investor, and political citizen of this country, I am troubled. I am sure you are too. So, I have a few things to say about this.
Let us first understand why we all just saw our collective credit score lose a few points. Fitch (the ratings agency) was quite explicit about it. Three reasons:
· The expected deterioration of government finances
· The already high debt levels
· Dysfunctional governance
If this move hasn’t made you the least bit anxious, it should. This may not have large immediate effects we will feel tomorrow, but it is yet another step down a slope we shouldn’t be sliding down. These small steps backward add up, gather momentum and before we know it, we will find ourselves in the heap of former empires - right next to the British, the Dutch, the Ottomans and the Romans. Empires don’t crumble because they lose wars; they crumble because they lose wars that they couldn’t finance.
In 1997, when I first landed in the US, public debt was $5.5T or 62% of GDP. Today, it stands north of $32T or 120%. How did we get so bad so quickly? The graph below shows debt burden as % of GDP. It is a story of bipartisan failure to govern.
In 2001, the prevailing downward trend was reversed after the US went into Afghanistan and Iraq. As costly as those wars proved to be, they pale in comparison to what came next. In 2008-10, we ran the economy aground through poor governance (unregulated financial markets), and responded with an epic bout of expensive self-soothing, spending enormous sums of money shoring up zombie companies. In 2020, a once-in-a-century outbreak causes us to go even further into the red through programs that were mostly necessary, but so easily defrauded. Throughout these two decades, under Democrat AND Republican administrations, taxes have been either reduced or held irresponsibly low, further growing our deficits. My anguish isn’t simply about where we find ourselves today. We have been here before (120% of GDP after WW2) and have grown our way out. What I am really worried about is that our politics don’t seem to produce the kind of leadership that can rescue us.
In an era when everyone has polarized into two camps, intent on either shaming the Right or owning the Libs, we seem to have left little room for sane, competent, technocratic pragmatists.
In this, I am as guilty as any. I too have cheered on the uncompromising voices. I too have confused political participation with partisanship. This week’s downgrade comes as a stark reminder that we are waging our political battles on increasingly soggy ground because the battleground is flooding quickly.
This material is intended to be of general interest, not personal financial advice or a recommendation to buy, sell or hold any security or adopt a particular investment strategy. Your circumstances and attitudes toward risk matter, and only an advisor working with you can give you specific advice. All investments carry the risk of loss, including loss of principal. Stock and bond prices can be volatile. Past performance is not an indicator or guarantee of future results. Diversification does not guarantee profit or protect against risk of loss. This material may not be reproduced, distributed or published without prior written permission from Sanjay Pamurthy/Artham Advisors LLC. Data from third party sources quoted here has not independently verified, validated or audited. Although information has been obtained from sources that Artham believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Artham accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Comments