What the Downgrade in US Debt Means to You

US government securities are considered the gold standard when it comes to bond quality. But the government’s consistent financial mismanagement has one of the top three rating agencies lowering its credit rating. This could mean higher interest rate expenses and, ultimately, higher taxes.

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Welcome back to your favorite podcast, 30 Minute Money, and it delivers action oriented smart money ideas, little bite-sized pieces. Joining me from our beautiful Roc Vox Studios in Bushnell's Basin just outside of Rochester, New York, is Steve Wershing from Focused Wealth Advisors. 

Speaker 3 (00:34):

Well, this is certainly my favorite podcast. Better be, I'm hoping it's yours, . 

Speaker 2 (00:39):

Of course it is. Well, so recently the Fitch ratings downgraded the US debt from AAA to AA plus. I don't know what that means, but downgrade, I have a feeling is not good. So we're gonna find out from Steve what exactly that means and how that affects us. 

Speaker 3 (00:54):

It is not good. It is not good. And that's, and I wanted to talk about it because it, uh, it, it actually may speed up something that we talk about a lot here and that relates to the kind of planning that we do. And so, you know, there's not a lot that, that, that we and the public can do about this. Mm-hmm. , but it does affect us because of what the government may do in response. So yes, the, the, um, all bonds, all income investments are, uh, well, not all of them, but all the publicly traded ones are rated by, by a rating service to give them a credit quality so that people can get an idea of how much risk is involved in, in buying a particular bond. And it's dominated by three of them. It's dominated by standard and Poors, Moody's and Fitch's ratings. 

Speaker 3 (01:36):

And, um, you know, and last recently, just like you said, you know, fitch's ratings just downgraded US federal debt, which is actually kind of a big deal. Mm-hmm. , because, you know, US treasury securities are considered to be the gold standard. They are the safest of For the world. For the world. Exactly. , you know, we, it, it's, they're, they're the safest ones here in the country. And, you know, because it's so rock solid, you know, because it, you know, these are all, you know, the risk in a bond is that somebody's gonna stop paying their bills. Mm-hmm. . And so, you know, treasury securities are considered to be the safest because they're backed up by the full faith and taxing power of the United States government. So, you know, if if it, if, if they needed to, they could just print more money to, you know, to, to pay 'em off. That always 

Speaker 2 (02:22):

Well, works well. 

Speaker 3 (02:22):

Exactly. So, and we don't want them to do that. But, um, and so, you know, for, for, for all three rating services, not to consider us treasury securities, triple A debt would triple A as the highest. Um, that's actually kind of a big deal. So I wanted to talk about that because of what some of some, what some of it may mean. You know, we are in a, we're in, in kind of rarefied air, um, in, in the world about, um, about those credit ratings, those credit ratings there, they're only there. So now there are nine countries. There were 10, but there are nine countries that have AAA ratings from all three rating services. And they're, you know, Austria, Australia and Denmark and Germany and Luxembourg and Switzerland, and, you know, a few countries like that US is no longer on that list because Fitches is, you know, has downgraded them to AA plus. 

Speaker 3 (03:12):

AA plus is still a pretty high rating, but it's not aaa and it's not, it's not clear that the other rating services will necessarily follow their lead, you know, fitches fit. Sometimes Fitches can be a little bit of an outlier, or as they say in the rating business, fitches be crazy , but, uh, . So, so, um, oh. You know, so it's not, it's not clear that standard and POS or Moody's are gonna follow suit with this thing, but, um, but it, it brings to light some things that are going on. So it's worth, it's worth, you know, worth looking into. Why did Fitch's drop their rating a little bit? 

Speaker 2 (03:51):

Does this have anything to do with the whole thing that was going on with not funding the government and all that kind of craziness that we've all been sweating about? 

Speaker 3 (04:01):

Exactly. Right. So, you know, basically what it comes down to is that, that Fitch is, is really questioning, you know, whether or not the us, whether the politicians that run the government are being good stewards of the, of the economy and the money. And you know, we, you and I talked about, uh, the, uh, the debt ceiling controversy and that, you know, the government, I think reasonably set limits on how much debt could be built up in the federal government and periodically bump into that limit. And, you know, what I would like to see is that they figure out a way to reduce the debt so they don't keep bumping into it. And what they invariably do is they raise the debt limit. So they said, yeah, well, maybe we can go a little farther, you know, maybe we can get another credit card. Um, you know, we can 

Speaker 2 (04:40):

Get how much, how much water can you fit on the boat before you actually start sinking? 

Speaker 3 (04:45):

Exactly. Exactly. . And, and it's like, oh, we can take on another bucket. We can take it onto the bucket. You know, so. Yeah, exactly. So, you know, but not only did they exceed the debt limit, um, and, and of course they play political games with it, right. What we said here, which is exactly what happened, is they're gonna argue it, they're gonna showboat, they're gonna make a big deal of it right up to the 11th hour, and then the last minute, they're gonna all agree on something that, that enables everybody to walk away claiming that they won. Right. That's not really a responsible way to run a budget. Right, right. I mean, that's, that's just politics. And, you know, the, the, the folks at Fitch's rating took note of that. So that was part of it. Part of it too is just the continuing deterioration of the finances of the government. 

Speaker 3 (05:31):

And, and, and what I mean by that is, you know, the how much we spend versus how much we bring in, and if we consistently overspend, that's just not a good way to run our, an economy. Now, the, the, you know, you or I could not get away with that in our household. Right. The government can get away with it because like I said, they can just print more money. That's not good. That's inflationary. But they could do it. We could do, but it'd be a problem. We could print our own money as well. Yeah, that's true. I, but I think there are probably a couple of rules around that. Yeah, I, I think so. I'm not too sure. And we'd have, then we'd have to persuade people to take that money, but, um, but you know, so we have, we have these ongoing deteriorating finances and, and, and, and what's ultimately behind a lot of that is there, there are growing doubts about the country's ability to handle the growing federal debt. 

Speaker 3 (06:20):

And so we'll take just a second to distinguish between deficit and debt. A deficit is how much you spend in excess of what you bring in. So that's an annual number. Typically, um, the debt is the, the, the total accumulated balance on that credit card. So if you, if you have a million dollar debt this year and you run a hundred thousand dollars deficit, then your debt is now 1.1 million. Make sense? Yeah. Yeah. So, but the debt is a problem for a couple of reasons. For one thing, it's 32 and a half trillion dollars. That is wow. A mindbogglingly huge number. Nobody, I don't think anybody can credibly say that they have an idea what that means, because the number is just too big. It's monopoly money at that point. I just, nobody has any idea what that really means, but it's really big. And to put it in context, the, the federal debt is now bigger than the economy as measured by the G D P, the gross domestic product. 

Speaker 3 (07:21):

Oh, that cannot be good. It's not, and there was a book written a few years ago that was kind of interesting, where they traced the, the rise and fall of, of, of civilizations and economies and that kinda stuff. And what, what they found was that once you got up to a certain level, you know, Donald Regan and the Reagan administration was famous for saying, deficits don't matter. And what I'm worried about is they don't matter until they do . And then when they do, they do in a big way. And that's what these people found in this study was that once you get, once, once the, the total debt gets to be bigger than, you know, a multiple of that economy, all of a sudden things start turning around and going downhill. So anyway, but it's big, it's, it's bigger than the economy. It's something like 25% bigger than the economy. 

Speaker 3 (08:06):

And so we really need to worry about that. In addition to that, not only do we have more debt, but debt is a lot more expensive now. So a year and a half ago, you could have, you could have gotten a treasury security for practically nothing. You know, like 1%, one point a half percent, somewhere in, depending on what the maturity was. And that that was, that actually was, that provided bad incentives for the government because they could just basically sell as many bonds as they wanted to because it didn't really cost anything. Well, now treasury securities pay an excess of 4%, and so the cost of the new debt is three times as high as it was before. So now when they issue debt, it actually gets pretty expensive. And as the, as the older debt matures, they've gotta rep, they can't, they don't have just cash on hand to pay that stuff off. 

Speaker 3 (08:53):

They're gonna need to issue new secu, new bonds to take the place of those. Then new bonds are a lot more expensive. And if your rating goes down, it gets even more expensive. Now, I don't think it's gonna have a big, I don't think it's gonna mean that much in terms of the interest rate, because everybody knows all this stuff that Fitz knows. So it's not like treasury securities are gonna go from four to 6%. That's not gonna happen. It might, it might bump it a little bit up, but, um, but the, but the point is that now it's, you know, above four and, and it used to be closer to one. And so as they issue new debt, the cost of that is going to be going up and up and up. The treasury department, uh, paid $213 billion in interest payments on the national debt in the last quarter of 2022. That was a, that was about higher than, um, than it's ever been. It was $63 billion more than the same period a year earlier. 

Speaker 2 (09:49):

That's just interest payments. 

Speaker 3 (09:50):

That's just interest payments. That's just, that's just the amount of interest that's accumulating, you know, so it's to, to sort of put that, put that in context. The Peter G. Peterson Foundation, which is nonpartisan, you know, takes a look at this stuff. They, they monitor this stuff because they think that we're spending too much money, um, projects that by 2032, interest costs will triple to more than $3 billion a day, which means about $9,400 per household in the us. That's, that's just interest payments. The federal government is gonna owe the bond holders. So it's really big, uh, at this point, those debt payments, those interest payments account for about 7% of all federal outlays. So all the money that the federal government pays out to everybody, 7% of that is interest on the federal debt. And right now that that interest is at about $396 billion, that is just to just put that in context, that $396 billion that they're gonna pay, let's compare that to veterans benefits and elementary and secondary education and disaster relief and agriculture and science and space programs and foreign aid and natural resources and environmental protection. If you add all those together and add a hundred billion dollars to it, oh my 

Speaker 2 (11:22):

Gosh, 

Speaker 3 (11:23):

That is how much we spend on interest. So it's really big 

Speaker 2 (11:30):

How I'm, I'm sure everyone's saying, well, how, how does this change? How do, what does it mean? How does it change? Like what, 

Speaker 3 (11:38):

You know, the, the, the, the, the, the only thing I can think of, yeah, the only thing I can think of is that, you know, write your congressman and vote for somebody different next time. I mean, this is what gave rise to the Tea Party 20 years ago, 25 years ago. And, you know, that was their, they, they ended up not being able to accomplish that. But I mean, that's, you know, it's, the only thing I can think of is, is that we need a change in Washington. But, you know, politicians, politicians get elected because they spend money. Yeah. And so, until we change, we as voters, until we change our perspective on that, it's not gonna change. You know? So I don't know what else to tell you. I'm not a political guy. I'm a financial guy, but that's just my amateur's view of it. Stick 

Speaker 2 (12:19):

To the numbers then. 

Speaker 3 (12:20):

. Yeah, right. Exactly. Yeah. Shut up, Steven. Stick to the numbers. Um, so, so, so what does it mean, what does it mean to us? This is, this is why, this is why. Yeah. I, I mean, yes, I love to complain about politicians, but that's not why we're talking about it on the podcast stuff, right? Um, there is that possibility that it could keep interest rates higher, uh, which is a bad thing because that means your credit cards will cost more, and if you need to get a new mortgage, it'll cost more, and those kinds of things. So having a, a really high federal debt will contribute to that. Um, there is, at least in theory, it should slow the economy down. Although there's a lot of controversy about whether or not it actually does. But I, I believe it, it, it is a, a, a, a a break on the economy. 

Speaker 3 (13:07):

It slows the economy down. But here's the, here's the big thing. Um, now that a rating service has actually downgraded the debt, especially if one of one or two of the other services downgrades the debt, it's really just a wake up call to the politicians that they're gonna have to face the music and start addressing this. And they've got a couple tools that they can use to do that. But the big one is taxes. That if they wanna decrease the federal debt, they're really gonna have to increase taxes. There are almost no other ways around it that would mean anything. There are a couple other tools, but they're so weak compared to the job that needs to be done. They need to get the big hammer. And the big hammer is taxes. And that's why the kind of planning that we do, and that's why I'm so, so motivated about this, you know, about let, let's get the work done while we have low tax rates, because, you know, they're probably gonna go up and they may go up substantially and bringing a light to the federal debt and the problems that it's causing, the government just accelerates that process. 

Speaker 2 (14:09):

And everybody's always talking. I mean, tax people vote their pocketbook. That's, that's just what 

Speaker 3 (14:14):

It is. Exactly. Exactly. But I don't, I I don't see any credible way around it. If, unless they want to, you know, keep escalating it till it ruins the economy. I don't, I don't see any way around having to raise taxes. So let's do planning now while we have low tax rates so that when it goes up, it doesn't hit you as much. 

Speaker 2 (14:35):

Well, there you have it from the horse's mouth. I didn't mean to call you a horse, Steve. I hope you don't mind. Yeah. , 

Speaker 3 (14:41):

I'm just a little horse today. , your retirement is at risk, not from the stock 

Speaker 4 (14:50):

Market, not from inflation. Taxes are putting your retirement at risk. I'm certified financial planner, Steve Waring, and I specialize in helping people create low tax retirements. Unmanaged taxes can take 30, 40, even 50% of your retirement income. Learn how to defend yourself against excess taxation. Our complimentary webinar will cover all the principles you need to know to protect your money for you and your family, and keep it away from the government. This free webinar will cover how taxes are different in retirement, the taxes you pay in retirement that you don't have to pay during your working life. How to move TA savings into a tax-free environment. The Widows Tax, the Secure Act, the Secure Act 2.0 and what they mean to you. The webinar is free, but you have to register to save your spot. So go to focused wealth advisors.com/webinars and find out more and sign up right there. Even if you're not planning to retire for the next five or 10 years, this information will be critical for you. The longer you have to put the strategies into effect, the more you can accomplished. That's focused wealth advisors.com/webinars to find out more and to sign up today. 

Speaker 2 (16:13):

And that's it for this episode, and we'll be back next time. Catch it at 30 Minute Money, like, subscribe, share, tell your friends, and we'll see you next time. 

Speaker 1 (16:23):