In a week full of news, it's fair to say the most unexpected report came when one of the three big credit rating agencies, Fitch, lowered its ratings on U.S. government debt. Nobody saw that coming. Critics of this decision have pointed to the bipartisan debt reduction agreement that President Biden and House Republicans reached back in June, and to the nation's strong economy amid falling inflation rates.
Their point is, how can Fitch raised doubts about U.S. government debt when the economy is benefiting from the most bipartisan policies we've seen in years? The answer to this question is, Fitch wasn't looking at recent events. Its decision was based on a long view of government tax and spending policies, and it didn't like what it saw. Fitch said there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters.
If we wind the clock back 20 years, what do we see that Fitch saw? Well, we'd look back on a decade of shrinking budget deficits during the 1990s, including, believe it or not, four years of budget surpluses that actually reduced the nation's debt. In 2001, surpluses were projected as far as the eye could see. What happened? That decade of strong governance during the 1990s gave way to massive tax cuts and increases in government spending that were not offset by spending reductions elsewhere, or by tax increases.
That spending binge was followed by tidal waves of deficits generated by responses to the earthquakes of the Great Recession and the Covid-19 pandemic. Over those 20 years, the federal debt exploded from $6.8 trillion to $30.8 trillion. That's what Fitch saw. Government policies that quadrupled the debt the nation had accumulated over its entire 200 plus year history.
Here's something else Fitch saw: they were more polite with their language, but can we call it anything other than insanity? This business of threatening the nation with default on its debt. And it hasn't happened only one time, and it's occurred repeatedly over the last decade. So Fitch has a point. This is not a record of sound governance. What does this mean for the nation's economy and for our personal finances?
It might surprise you, but the immediate effects will probably be pretty modest. U.S. government debt will continue to be the most trusted debt in the world. But U.S. stock markets reacted negatively to the news, and investors may turn more cautious. But attention will quickly return to the dominant economic question these days, can the fed slow the hard economy and tame inflation without triggering a recession? And what does this mean for you and your finances?
The Fitch downgrade should bring our attention back to one of the major sources of uncertainty in financial markets today. Is Washington capable of managing, or at least not derailing, the strongest economy in the world? Fitch is telling us an obvious truth there is room for concern.
In the face of that concern, it makes sense to hedge your bets, and gold is one of the best ways to do that. I call it wealth insurance. Gold has a track record of offsetting losses elsewhere in a portfolio when markets turn sour. Economic conditions are different today, so we can't be certain that gold will respond in a similar fashion now. But if the downgrade of U.S. debt weakened space in the dollar, or allows the fed to loosen interest rates by slowing the economy, I expect a breakout in gold prices.
