U.S. Credit Downgrade Doesn’t Even Factor Inflation Risks

You've probably already seen the news about Moody’s downgrade of the U.S. government’s credit rating.  But the biggest takeaway for us here at Money Metals is that so many people seemed surprised. The reaction should have been, “Tell us something we didn’t already know!”

Last Friday, Moody’s cut Uncle Sam’s credit rating by one notch, from AAA to AA1. In doing so, they pointed out that successive U.S. administrations and Congresses have done nothing to reverse the trend of large annual fiscal deficits and growing interest costs.

How could anybody not see this coming?

Way back in November 2023, Moody’s lowered its outlook on the U.S. government credit from “stable” to “negative.” This is often a prelude to a downgrade in the country’s AAA credit rating. And here we are.

Moody’s is merely the last of the major credit rating agencies to keep U.S. debt at a AAA rating. Standard & Poor’s (S&P) cut the U.S. sovereign rating a notch from AAA to AA+ in 2011. Fitch followed suit last year, citing “the expected fiscal deterioration over the next three years.”

We’ve known for some time now that the federal government is in a downward fiscal spiral. The national debt surged over $36 trillion last fall, and despite some headlines generated by DOGE, there is no sign that the spending is going to slow down. In fact, spending is up.

The Trump administration blew through nearly $592 billion in April. That was 4.4 percent higher than April 2024’s spending. At $4.16 trillion, spending is up 8.9 percent through the first seven months of fiscal 2025.

And the proposed federal budget for next year would add trillions to these already massive deficits.

Stocks fell on the news about the Moody’s downgrade, and bonds also sold off. The 10-year Treasury yield surged to nearly 4.6 percent, and the 30-year hit levels not seen in nearly 18 years.

Again, this isn’t surprising. Moody’s reminds the world that the U.S. is mired in a fiscal mess with no political will to fix it. Why would you lend even more money to your irresponsible, drunk uncle?

The slide in demand for Treasuries exacerbates a growing problem for the federal government. As yields rise, it becomes more and more expensive for the federal government to finance its borrowing and spending problem.

Interest on the national debt cost $101.7 billion in April. 

So far, in fiscal 2025, the federal government has spent more on interest on the debt than it has on national defense ($536 billion) or Medicare ($550 billion). The only higher spending category is Social Security ($907 billion).

Uncle Sam paid $1.13 trillion in interest expenses in fiscal 2023. It was the first time interest expense had ever eclipsed $1 trillion. Projections are for interest expense to break that record in fiscal 2025.

Some people think the Federal Reserve can intervene with rate cuts and mitigate Uncle Sam’s interest problem. But the fact is, the Fed has little control over the long end of the yield curve. This was apparent when Treasury yields spiked even after the Fed cut rates last year.

The only thing the Fed can do is run quantitative easing (QE). In QE operations, the central bank buys U.S. Treasuries on the open market, creating additional demand. This typically drives yields lower. However, there is a downside. When running QE programs, the Fed buys bonds with money created out of thin air. This is, by definition, inflation.

In a post on X, Bridgewater Associates founder and billionaire Ray Dalio alluded to this, saying the U.S. debt problem is even bigger than the Moody’s downgrade suggests because credit rating agencies only factor in the likelihood a country won’t pay its debts.  They don't factor the likelihood of money printing by governments to pay their debts, leading to "losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting).”

The Moody’s downgrade didn’t tell us anything we didn’t already know. It merely put the issue back in the headlines.

Turning to gold and silver, the metals are having a pretty strong week. Gold has come roaring back and is having its best week in a month and a half. The yellow metal is up more than $150 or 4.9% to come in at $3,374 an ounce. Silver is up about $1 to check in at $33.53, registering a weekly gain of 3.2%. 

But the real story is in the PGMs with platinum surging 10.2% and currently trades at $1,113. Palladium is having a little less success, as we’re seeing a bit of a divergence between the price of the two metals. Platinum and palladium had been trading at relative parity with each other for the last 3+ months, but that has changed this week. Palladium is up 3.5% to trade at $1,032, a full $81 less than its sister metal platinum at this point.

********