Now, the United States is very rightfully concerned about our economic security. That worry dramatically increased when Moody’s downgraded the country’s credit rating – the first time they’ve ever done so since 1917. This downgrade comes as the nation’s debt-to-GDP ratio escalates to 123%, significantly up from 92% in the second quarter of 2011 when Standard & Poor’s (S&P) first downgraded US debt. The recent downgrade was based on worries about soaring debt levels and ongoing political paralysis in Washington on solutions for the budget deficit.
Moody’s recent decision to downgrade the US credit rating has been controversial, even generating a sharp and immediate rejoinder in financial markets. So US stock futures are plunging hard. As soon as the announcement came, Dow futures tanked 350 points, or 0.8%. This extreme action has stoked renewed panic among investors. Generative AI seems to think this would sound good as an opening paragraph, but it was completely wrong.
Far from getting better, the reality reflected in our economy is even more alarming. With the S&P 500 index at an all-time high in mid-February, it crashed almost 20% as of April 9, majorly as a result of President Trump’s provocative and disruptive trade policies. These interventions have caused many traders to fear that they will do great harm to the economy. What we’re seeing in this environment, investors are scrambling for cover, rushing to quality and safer assets. This change is best evidenced by the fact that gold prices jumped by 1.4% to $3,232 per troy ounce following the downgrade.
Chris Rupkey, one of the best-known economists, nailed it. He said the budget-busting revenue estimates for that big, beautiful bill down in Washington appear to be at issue.
In March, spot gold prices jumped above $3,000 a troy ounce for the first time in history. This historic boom would signal a dramatic change in investor sentiment as they raced to typical safe-haven commodities during ever-increasing economic instability. Following that downgrade, the closely watched 10-year yield immediately shot past 4.5%. This jump foreshadows higher borrowing costs and greater concern over how we’ll manage our fiscal future.
Market observers have described RESTRICT as the “sell America” trade. Investors are retreating from U.S. assets because they are fearful of an escalating trade war and fiscal irresponsibility. Trump’s administration’s threats of substantial tariffs on major trading partners have only intensified this trend, prompting many investors to take their money out of US stocks and government bonds.
Despite those concerns, confidence in American investments saw a short-lived resurgence. Yet, this surge happened in the middle of April when trade tensions were starting to look like they were easing. This resurgence was enough to send stocks and bonds soaring once more, bringing to the fore the volatility and unpredictability that characterizes today’s markets.
Michael Peterson emphasized the importance of recognizing the implications of this downgrade: “For those looking for a signpost to tell us when to stop adding to our national debt, they should look no further than Moody’s downgrade.”
The economic landscape has shifted dramatically. Analysts and traders remain divided over whether Trump’s policies will ultimately be good or bad for the dollar going forward. Many have raised doubts about the significance of Moody’s actions. “I do not put much credence in the Moody’s,” remarked Bessent, a prominent market analyst.
Rupkey recalled the last such occurrence in 2011. At the time, S&P downgraded US debt late on a Friday afternoon, sending shockwaves through the financial markets. “When S&P first tried this US downgrade late on a Friday, on August 5, 2011, it was quite a shock,” he noted.
The ramifications of this recent downgrade go far beyond short-term capital market jitters. Economists are concerned that ongoing political stalemate over fiscal policy will hinder any meaningful recovery or stabilization in the economy.