On The US Downgrade

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Hi everyone - this is Alf.I hope you're having a great day.On Friday, the credit agency Moody’s downgraded the US rating by one notch to Aa1 (equivalent to AA+).By now, you’ve probably read tens of opinion pieces arguing this is the beginning of the end, and that there will be dire consequences for the US Treasury market.In this piece, you’re going to read a more sober and data-driven approach to this downgrade.The first thing to understand is why Moody’s downgraded the US: ‘’ Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest cost’’.The mainstream take here is that this makes sense because the US will never be able to repay its debt and because interest costs have now exceeded $1 trillion per year.Once you understand the monetary system, both these assertions don’t make any sense:Any government doing deficit spending and issuing bonds in its own currency (like the US) is not walking into an abyss of doom – it’s just choosing to stimulate the economy by printing money for the private sector.It doesn’t have to repay anything – if it tries that via budget surpluses it will cause the opposite effect and end up hurting the private sector (via higher taxes).The process of fiscal deficits creating money for the private sector is explained in the T-Account chart.Step 1 is the government blowing a hole in its balance sheet to print money for the private sector (aka deficits), which adds net worth for households and corporates which see their net bank deposits increase. These deposit…