Ratings agency Fitch downgraded the United States debt from AAA to AA+. This certainly delivered a headline for news outlets, but what is the real significance of this downgrade?
The short answer is not much at all. The United States, while downgraded on their debt from Fitch, is still considered a safe place to keep money. In times of panic money migrates to US Treasuries as we believe the United States sovereign debt is considered the most stable currency in the world. While values fluctuate, (the dollar’s value will rise and fall), that does not diminish the perception that the United States is one of the safest places to keep money.
However, you may ask yourself: doesn’t the United States have $31 trillion of debt? The answer is yes and it’s not a good thing. Those who are worried about the dollar often times point out this fact as evidence that the US will lose its established currency dominance in international trade. This may happen at some point, but we don’t believe this will happen anytime soon. Quite simply, we believe the United States is one of the strongest economies in the world and investors recognize this.
A recent article and CNBC outlined the US dollar downgrade. In this article, Jamie Dimon agrees with our position. You can find an excerpt here:
“The Fitch Ratings downgrade of the United States’ long-term credit rating ultimately doesn’t matter, JPMorgan Chase CEO Jamie Dimon told CNBC on Wednesday.
“It doesn’t really matter that much” because it is the market, and not rating agencies, that determine borrowing costs, Dimon told CNBC’s Leslie Picker.
Still, it is “ridiculous” that countries including Canada have higher credit ratings than the U.S. when they depend on the stability created by the U.S. and its military, Dimon added.
“To have them be triple-A and not America is kind of ridiculous,” Dimon said. “It’s still the most prosperous nation on the planet, it’s the most secure nation in the planet.”
Fitch downgraded the country’s rating to AA+ from AAA on Tuesday, pointing to “expected fiscal deterioration over the next three years,” an erosion of governance and a growing general debt burden.”
The U.S. cannot act irresponsibly forever, and we expect for the dollar to remain stable. Deficits have to be attacked at some point. But for the time being, we believe that the U.S. economy still maintains its advantage over other economies. For that reason, we just don’t see the downgrade will amount into much on a real-world basis.