Guest post from Shan N., an economist based in India on Dollarcollapse.com and The Daily Bell:
Moody’s downgraded the US government’s credit rating on May 16th from Aaa to Aa1, citing the uncontrolled increase in government debt over the years. Moody’s also forecasted the debt-to-GDP to rise to 134% (98% in 2024) and the annual deficits to widen to 9% (from 6.4% in 2024) by 2035 as the rationale for the downgrades.
The specific numbers are not very important at this stage, and in any case, Moody’s estimates are massive underestimates even from a 2030 perspective, let alone 2035. But more importantly, the agencies are missing the “Forest For The Trees” in their analysis. If one understands the actual state of US Government finances, anything more than a JUNK rating would be an overvaluation. The only significance of the recent downgrade is that this is the first time in more than 100 years that all the major rating agencies have downgraded the top-tier credit status the US Government had hitherto enjoyed.
Before the numbers, readers must understand the unique position of the US Government. It is the ONLY government in the world where the external debt can be denominated in the currency it can create out of thin air. No other government has this privilege. That said, this was essentially an “earned” privilege due to the record budget and trade surplus that the US was running under the Gold Standard for more than a century and a half before the formal Bretton Woods agreement in 1944. The US Dollar also maintained its purchasing power over the period: viewed in terms of gold prices, the US Dollar had declined in value from 1/20th an ounce of gold during 1800 to 1/35th an ounce of gold by 1971. That is about a 75% decline in purchasing power over 180 years – almost a steady-state condition in the context of what has happened after 1971.
Now for some numbers used by Moody’s: The number almost always used in the context of debt is the National Debt and that is nearing $37 trillion. The US GDP in 2024 was about $29 trillion and so the debt-to-GDP is already at 127%. It is unclear why Moody’s is reporting a lower debt-to-GDP at 98%, but this is probably because of excluding specific categories of debt. It could also be the case that they are using nominal GDP and not real GDP.
But as I said in the beginning the specific numbers are not relevant in the context of the US. Let us assume the debt-to-GDP is 200%. Will the US Government default under those conditions? Not in the traditional sense of the word “default” i.e. non-repayment of the US Dollars owed. The US government can always print; even if the debt-to-GDP is 1000%, it does not need to default.
Greenspan summarized this best when he said “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default”
So, the debt-to-GDP condition reaching 134% or even 200% does not imply a default as it would for almost any other country. Now comes the critical question – if the probability of default by the US Government is ZERO under any debt condition, and it indeed appears to be the case, as Greenspan stated, then what are these rating agencies even measuring? – It is the default mechanism available to governments in general and, more specifically, to the government that owns the world’s reserve currency, “Default Through Monetary Inflation (DMI).”
DMI is a mechanism in which lenders lose not the absolute amount of the currency they lent but the vastly decreased purchasing power of the currency they receive from the borrower. For example, if the borrower had been promised $100 at the end of 5 years during a time of stable prices (i.e., price inflation is zero or close to it) and if the government ran an annualized price inflation of 20% over the subsequent 5 years, then the lender would have lost almost 60% in terms of today’s purchasing power of the currency. The readers need to understand that the mechanism of DMI is an option specifically available only to governments and not to private borrowers.
In practical terms, receiving the promised quantum currency that has lost 60% of its purchasing power is the equivalent of taking a 60% hair-cut on the debt with the currency retaining its purchasing power. The latter is indeed a honest default and a preferable option.
Therefore, the PRIMARY RISK rating agencies have to measure the US Government against is DMI, not the normal default mechanism that they do for other countries/companies. From the perspective of DMI, the probability of losing substantive purchasing power of US Dollars over the next few years is 100%—maybe even near 100% of the purchasing power, i.e., hyperinflation, and that is increasingly looking like a probable scenario.
The Numbers – Deep Dive
Though Moody’s focussed on debt-to-GDP as well as deficit %, the latter is not a very meaningful indicator and can display wide fluctuations on an annual basis. The debt-to-GDP on the other hand, is a summary of the historical deficits to date and hence reflects the pattern of US Government spending over decades. Think of debt-to-GDP as the Balance Sheet and the deficit % as the Profit and Loss statement – it will be clear why we should focus on the former from a rating perspective.
As one can observe, debt-to-GDP has been on an upward trajectory since 2000, and it has gone up from 55% to over 120% today. This has happened in the context of what is seen as spectacular prosperity – booming stock markets (Dow has gone from 11,000 to 42,000 in the last 25 years) and relatively stable prices (CRB Index has gone from 150 to 360 for a CAGR of 3.5%).
This 120+% continues to increase as the annual deficits are at least $2 trillion per year. This increases the National Debt by more than 5% while the GDP is growing at around 2% in the best-case scenario. So, the debt-to-GDP will continue to increase in the foreseeable future until the US dollar hits a breaking point.
While the Moody’s might indicate the current $37 trillion of debt as a threat to the ratings, it ignores the $200 trillion of off-balance sheet liabilities in the form of promised Social Security benefits and Medicare claims for which the US Government has already received the premiums. From the traditional sense of “default” i.e. non-payment of promised currency, the US Government is far more likely to default on the $37 trillion of National Debt rather than the $200 trillion of obligations to its citizens. The reason is simple – the latter can vote.
If $37 trillion led to a downgrade of Aaa to Aa1, what should taking into account an additional $200 trillion do to the ratings?
The Imminent Crisis for the US Dollar
About $9.2 trillion of the existing national debt will mature in 2025 and will need to be refinanced in the markets. Add to this the year-long deficits of $2 trillion, and the bond market is looking at a supply influx of $11+ trillion in the next six months. So, who is going to purchase these bonds?
Very few nations would have absorbed this influx even under normal political conditions. Given the number of enemies Trump has created using his “I love Tariffs” negotiation tactics, the only significant buyer left will be the US Federal Reserve. Even his recent trip to the Middle East should be seen in the context of exploring buyers for the Treasuries coming up for sale. But these are hard-nosed businessmen Trump is dealing with, so there will be no meaningful purchasers of Treasuries—at least not at the current interest rates.
Trump has inadvertently converted the US Fed from the buyer of the last resort to the buyer of the ONLY resort. Whether the US Fed calls it QE or by any other name doesn’t matter. The net result is that it will result in an explosion in the money supply and, eventually, price inflation.
So, the choice is clear: Should the US Government stand by and allow interest rates to increase substantially, at least 100 to 200 bps if not higher, to enable a market buyer for these treasury issuances? Or should the US Fed step in to buy these treasuries that will lead to an explosion in money supply and price inflation months out? I guess it will be the latter scenario (i.e., QEs by any other name), and the consequent price inflation can be blamed on the Chinese communists, the greedy oil sheiks, and the weather.
Either way, long-term rates will rise substantially from their current levels going into 2026. What will that do to the already deflating housing bubble?
The US Dollar End Game
For a long time now, the US Government and its citizens have managed to live way beyond their means—thanks to the strength of the US Dollar, which they could digitally print at will and spend. The rest of the world (particularly the Chinese) has been subsidizing the US consumers to have a standard of life that they themselves should be rightfully enjoying. That game is, for all practical purposes, over.
The process of retooling and focusing on internal consumers rather than exports has started. The Chinese Government needs to aid this process by allowing the Yuan to appreciate significantly vis-a-vis the US Dollar, which will provide purchasing power to their citizens.
The rating agencies have done a real disservice for decades by not pointing out the terribly flawed fundamentals behind the US Dollar. Even last week’s meaningless downgrade was accompanied by so much sugar-coating that it begs the question of whether these economists even know what they are talking about.
Make no mistake, the US Dollar has been on the path of hyperinflation for a few years now. Trump’s rhetoric has accelerated the process. The very last hope of DOGE has eventually turned out to be a nothing burger, as I had suspected earlier (Zero Hedge—DOGE is Dead on Government Expenditures). Wheelbarrows and the use of currency for purposes other than monetary transactions are coming to America before the end of this decade.