With $37 Trillion in Debt, Is the U.S. Headed for More Credit Downgrades?
On August 11, the United States reached an unfortunate milestone: $37 trillion in gross debt. Looking ahead, we are adding debt faster than ever and are currently on pace to borrow an additional $1 trillion every five months. Despite this worrisome outlook, Congress passed the One Big Beautiful Bill Act, adding an additional $4.1 trillion to deficits over the next decade.
In recent years, major credit rating agencies have taken notice of the nation's unsustainable fiscal path. On May 16, Moody’s Ratings downgraded the U.S. credit rating from Aaa, its highest rating, to Aa1, a tier below, citing the inability of the nation to address large and growing deficits. With this revision, Moody’s joined Fitch and Standard & Poor’s (S&P), which downgraded the United States in 2011 and 2023, respectively.
When the United States faced its first downgrade in 2011, S&P cited dynamics around the inability to stabilize the government's debt and cautioned that further downgrades could follow if the long-term trajectory were ignored. Twelve years later, Fitch pointed towards the nation’s high and rising debt while also noting the lack of a plan to address the debt’s drivers.
As a result of those downgrades, the United States now finds itself with credit ratings below its former AAA peers (such as Australia, Denmark, and Germany) and instead finds itself among nations like Austria, New Zealand, and France. However, even among those nations, the United States is still a fiscal outlier, given that it has approximately 119 percent of gross debt to GDP and an annual deficit of more than 7 percent. According to the International Monetary Fund, the United States is more fiscally imbalanced than its new peers, which indicates that if the U.S. dollar were not the world's reserve currency, our credit rating could fall even further.
Financial institutions continue to treat U.S. debt as a safe asset class, but successive downgrades reveal that this privilege is at risk. If market observers, including the ratings agencies, continue to lose faith in the safety of Treasury securities, the United States will have to offer higher rates of return to attract investors, which would put upward pressure on interest rates.
This upward pressure on yields would occur in an already high-interest environment, which has substantially increased the cost of servicing the nation’s existing debt load. Between 2017 and 2021, annual net interest costs averaged $332 billion. Last year, net interest payments cost the government $880 billion and, over the next decade, are projected to average $1.4 trillion per year. Unfortunately, the Congressional Budget Office projects that interest rates will remain well above those levels in the future, significantly contributing to growing deficits and debt. Additional upward pressure on interest rates would further exacerbate the national debt — and add to concerns from market observers about our fiscal health.
Three successive downgrades of the U.S. credit rating should alarm our elected leaders. For decades, the United States has seen significant benefits from having the dollar as the world’s reserve currency. Unless we change course and improve our fiscal condition, we may put that position at risk.
Photo by Derek White/Getty Images for the Peter G. Peterson Foundation
Further Reading
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Most federal debt is owed to domestic holders, but foreign ownership is much higher now than it was about 50 years ago.
The Fed Reduced the Short-Term Rate, but Interest Costs Remain High
High interest rates on U.S. Treasury securities increase the federal government’s borrowing costs.