Charles Esther
Moody’s Investors Service downgraded the United States’ sovereign credit rating from Aaa to Aa1.
This marks the last major credit rating agency to lower America’s top-tier credit status.
The downgrade was announced on Friday and attributed to growing federal deficits and rising interest payments.
This move follows similar actions by S&P Global Ratings in 2011 and Fitch Ratings in 2023.
Ray Dalio Highlights Hidden Risks Beyond the Downgrade
Billionaire investor Ray Dalio shared his concerns on X (formerly Twitter), warning that Moody’s downgrade underestimates the risks facing US government debt.
Dalio explained that credit ratings mainly assess the risk of the government failing to pay its debts.
However, they do not consider the broader danger that the government might print money to cover obligations.
He pointed out that such money printing could devalue the currency and cause losses for bondholders.
Dalio emphasized that those worried about the value of their money should be more cautious than the downgrade suggests.
Market Reaction to the Credit Rating Change
Following the announcement, stock markets declined on Monday.
At the same time, US Treasury yields surged, reflecting increased investor concerns.
The yield on the 30-year Treasury bond jumped to 4.995%.
The 10-year Treasury bond yield rose to 4.521%.
These shifts signal greater borrowing costs for the US government.
GOP Tax Bill Raises Further Debt Concerns
Investor worries intensified due to a new tax cut bill proposed by House Republicans.
This bill includes tax breaks for wealthy Americans, such as a higher estate tax exemption and interest tax breaks for private equity.
It also proposes increasing defense spending by $150 billion and expanding the child tax credit by $500.
Additionally, the bill would eliminate taxes on tips and overtime pay.
Fiscal Impact According to Yale’s Budget Lab
Yale’s Budget Lab, a nonpartisan policy research center, analyzed the bill’s effects on the federal deficit.
Their report found that the proposed legislation would significantly increase the national debt.
Even after considering possible revenue from tariffs, the debt-to-GDP ratio could exceed 180% within 30 years.
Currently, only Sudan and Japan have debt-to-GDP ratios above 180%.
The report labeled the bill as potentially the largest spending package in US history, with a baseline cost of $3.4 trillion.
Legislative Progress and Political Outlook
Despite previous rejection by the House Budget Committee, the bill narrowly passed the committee in a rare Sunday night vote on May 18.
It now advances to the full House for a vote expected this week.
The slim Republican majorities in both the House and Senate increase the chances of the bill’s passage.
Conclusion: Balancing Debt Risks and Political Realities
Moody’s downgrade highlights growing fiscal challenges for the US government.
Investor reactions show heightened concern about future borrowing costs and economic stability.
Ray Dalio’s warnings remind us that rating agencies may not fully capture risks related to government money printing.
Meanwhile, political proposals such as the GOP tax bill threaten to exacerbate America’s debt burden.
The coming weeks will be critical as lawmakers decide the nation’s fiscal path forward.
Open commentary from financial experts and policymakers will continue to shape public understanding of these risks.
