The status quo of US ratings

The lowering of the US rating by Moody's has passed off as a non-event.

- MADAN SABNAVIS

S&P and Fitch had done the same quite a while back. S&P did so in 2011, post-Lehman crisis, and Fitch followed a little over a decade later in 2023. The state of the economy is well-known. The US has a fiscal deficit ratio of 7.6% and evidently spends more than it earns. The debt-to-GDP ratio is 124%, one of the highest in the world. The current account deficit was at 3.9% as of December. All these indicators should have raised a red flag from the point of view of credit rating companies. But this is taken to be a normal given that it is the US. Therefore, downgrading a notch does not really mean much.

The present downgrade has been driven a lot by what the new regime could end up doing. Higher tariffs will necessarily increase inflation, which in turn will put pressure on the Fed on rates, which can lead to a slowdown in economic growth. Some also say that the phenomenon of stagflation cannot be ruled out where inflation remains high and GDP growth slows down, if not turn negative.

How then does the US manage this situation with ease? The answer is that for all practical purposes the dollar is the anchor or reserve currency in the world. Dollars are used primarily for all global transactions. The euro, pound, yen, and Swiss franc follow, but the dollar is supreme. If that is the case with transactions, there is dependence on the US for the supply of dollars. Only when the US runs a high deficit will there be more treasuries that are issued, which central banks all over the world can invest in. Otherwise, this investment option will get diluted.