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Fitch just downgraded the US’s credit rating

by Rachel MillsAugust 8, 2023
Dominos falling

Another domino just fell for the dollar…

Why did they do this and what does it mean? Fitch is a credit ratings agency, like Moody's and Standard & Poor's. They cited debt and contentious debt ceiling negotiations as spooking them a little on the US's financial position. Relative to those two issues, this was a teeny tiny movement in response. Here is a chart showing the trajectory of our national debt.

And who can forget the bi-annual debt ceiling negotiations and the political brinksmanship involved every single time?

Imagine, if you will, a family with an income of $70,000 that spends $90,000, which puts an additional $20,000 on credit cards every year, credit cards that already have balances of $450,000!

And they are arguing about whether or not to make the minimum payments. They are also arguing about how many new cars to buy this year.

Does that family have a perfect credit score?

In fact, they don't. Standard & Poor's was the first to downgrade the US in 2011 after that debt limit fight. So the question isn't really why did Fitch downgrade the US. It is why hasn't Moody's followed suit as well?

Treasury Secretary Janet Yellen scolded Fitch in response saying, "Fitch’s decision does not change what Americans, investors, and people all around the world already know. Treasury securities remain the world’s preeminent safe and liquid asset, and…the American economy is fundamentally strong.”

But is that what the world really knows?

If so, why are they slowly backing away from US treasuries?

Our two largest debt holders are China and Japan. They have both been quietly backing away from US treasuries. Do they KNOW Treasury securities are safe and liquid?

International holdings of US debt are down overall, dropping from $7.581 T to $7.527 T in May. Japan dropped its holdings from $1.127 T to $1.097 T while China dropped from $868.9 B to $846.7 B.

What are they buying instead? You know.

This is critical for American savers and investors to follow because China and Japan are our bankers, to a large extent. Up until recently, they have been very dependable about buying up all the debt we can print. If they stop buying, we could see serious financial chaos here at home VERY quickly. If demand for our debt tanks, we have a few choices. Our politicians can stop spending so much (not likely). Or we can accept that all of that debt will stay here at home and likely drive inflation at our grocery stores and shopping malls.

A diminished value of the dollar means diminished value of your retirement savings as well. Will the events of today increase the burn rate of your retirement nest egg tomorrow? Are you in danger of out-living your savings? Central banks are adding gold to their reserves as a defensive mechanism against falling value of the dollar. The same move is available to you.

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