US-bond Rating Falls and All Yellen's Yelling Can't Fix It

Biden Administration Attacks Fitch Over Downgrade

Janet Yellen (13 July 2017, Mark Werner, Wikimedia Commons)

Last night the debt-evaluation firm Fitch Ratings downgraded the U.S. government’s credit from AAA to AA+. The Nasdaq fell 2.17 points today. The S&P 500 was down 1.38 points. And the Dow fell a point.

“We expect the general government (GG) deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden,” Fitch said in its statement. “Tighter credit conditions, weakening business investment, and a slowdown in consumption will push the U.S. economy into a mild recession” at the end of this year and beginning of next.

Fitch further explained: “The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”

The two other hallmark ratings firms, S&P Global Ratings and Moody’s, have not changed their public evaluations of U.S. Treasury bonds. S&P had already downgraded the government to AA+ in 2011 and has kept it there. Moody’s continues to score U.S. Treasurys at AAA.

“I strongly disagree with Fitch Ratings’ decision,” said Treasury Secretary Janet Yellen in a press release. “The change by Fitch Ratings announced today is arbitrary and based on outdated data. Fitch’s quantitative ratings model declined markedly between 2018 and 2020—and yet Fitch is announcing its change now, despite the progress that we see in many of the indicators that Fitch relies on for its decision.”

Despite Yellen’s protest, Fitch’s decision was expressly and substantially based on more-recent events and near-future expectations.

Media outlets paraded out quotes from professional economists, i.e. the same class that has a demonstrable history of dismissing credible, data-driven economic forecasts, noticeably when said forecasts call into question their own stewardship.

The B.B.C., for example, quoted former Harvard President and Obama Treasury Secretary Larry Summers, who tweeted that Fitch’s decision was “bizarre and inept.”

Absent from the B.B.C.’s coverage is the fact that Summers left Harvard’s presidency in failure, facing a vote of no confidence. “Bizarre and inept” are exactly the words many would use for his performance in that post.

The B.B.C. also quoted Mohamed El-Erian as calling Fitch’s move “strange.” In so doing, the B.B.C. attributed El-Erian as “the chief economic adviser at financial services giant Allianz.”

But the B.B.C. noticeably omitted that El-Erian chaired President Obama's Global Development Council from 2012–17. Readers were thus left to figure out for themselves that El-Erian was implicated in the “erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades,” cited by Fitch in its decision.

The B.B.C. further noted that “Nobel Prize-winning economist Paul Krugman said ‘the biggest economic news over the past year has been America's remarkable success at getting inflation down without a recession.’"

Krugman openly endorsed Hillary Clinton in 2016.

Largely if not entirely missing from the B.B.C.’s coverage was a single nonpartisan or conservative economist, although—a long time ago in a galaxy far, far away—Alec Phillips of Goldman Sachs was a senate staffer to Bill Roth on the finance committee. (Phillips told the B.B.C., “The downgrade mainly reflects governance and medium-term fiscal challenges, but does not reflect new fiscal information.” And it "should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change.")

That this group takes umbrage at Fitch’s candid evaluation of government spending is unsurprising, given their past policies of deficit spending and heavy-handed central economic management and regulation. Overall, the narrative from the left’s partisan economists amounts to a thinly veiled attack on Fitch as a ratings firm. It is not unprecedented.

Two weeks after S&P downgraded the government’s credit rating in 2011, the Obama Securities and Exchange Commission and Justice Department announced they were probing S&P. Two years later they filed a $5-billion suit, which S&P blasted as “impermissibly selective, punitive and meritless." The Obama administration brought the suit "in retaliation for defendants' exercise of their free speech rights with respect to the creditworthiness of the United States of America,” S&P told the court.

The Obama administration refused to provide White House records relevant to the suit’s genesis, which may have spoken to its motives in filing it.

Of course, the media and Washington do not wish to now discuss reducing government spending and regulation to address the core economic problems that caused the downgrade, e.g., America’s expanding $76.4-billion trade deficit. But the markets are not fooled. And neither should be my readers.