Your Fair Share

Answer: There are several major credit rating providers that include Moody’s, S&P, and Fitch. On May 16, 2025, Moody’s downgraded the U.S. government’s rating from Aaa to Aa1 which is in line with ratings from S&P and Fitch. The reason for this is the country’s $36 trillion debt level. The move by Moody’s is more symbolic than anything, bringing it in line with the other rating companies.

The change in the rating pushed Treasury rates higher. Investors typically demand higher rates of return when risk increases or is perceived to increase. The move also has the potential to dampen market sentiment. Since the U.S. economy is driven by consumers, consumers’ opinions are important.

Let’s take a minute and compare the national debt of $36 trillion to someone’s credit card debt level. If your credit card debt were $292,000 and income was $100,000, based on current 10-year Treasury Bond interest rates, the annual interest payment would be $13,162.50 or just over 13% of your income ($292,000 x 4.5% = $13,162.50). Even if you received a huge raise at work and decreased household spending, it may help to pay down some of the debt, but it’s doubtful that you could eradicate the $292,000. In comparison, the US debt level per person based on a population of 340 million, divided into the $36 trillion debt level, equals $105,882.35 each or $423,529.40 for a family of four. This is a hypothetical story and not indicative of any specific situations or client. It is presented only as an example and is not intended as investment advice.

The US government now spends approximately 3% of its budget on the annual interest for our debt. Increased gross domestic product (GDP) could help pay off some of the national debt. However, the nation can’t rely on growing its way out of the problem. The US government can reduce spending to slow increases to the debt, just as a household would spend less and use the savings to pay off credit card debt. This is likely a little trickier for the government, though, because finding ways to reduce spending may involve reducing the three largest sectors of US spending, which are health insurance (including Medicare and Medicaid), Social Security, and defense. Cutting defense isn’t a viable option, and reductions to healthcare and supplemental retirement income would be met with strong opposition.

Another solution would be to increase US government revenue by raising taxes. Although the political cry is often to “tax the rich,” there simply aren’t enough rich people to tax and make a significant impact on the national debt. Even though the middle class is shrinking, it still represents about 51% of American households, and taxing this group would be highly unpopular.

Inflation can also help ease the national debt but would have negative and positive effects. In essence, inflation decreases the spending power of the dollar. While the number of dollars of debt remains constant, the real value of the debt decreases because of inflation (the dollar has less value). Since the value of money is decreasing, the government is effectively repaying debt using currency that is worth less than when the debt was initially incurred.

The three solutions: 1) deep spending cuts (including entitlements), 2) taxing the middle class, or 3) inflation, aren’t popular remedies to our debt problem. Substantial economic growth is welcome but certainly not guaranteed. Although the government has more options than a household with high debt, there is a point of no return. In other words, once the interest on the debt becomes too big of a burden to manage based on the nation’s revenue, the nation can be in trouble. Deficit reduction requires making tough and unpopular decisions.

The positive side is that the U.S. remains the largest economy in the world, producing 27% of the world’s gross domestic product. By comparison, the U.S. produces 61% more GDP than the next highest nation, which is China. China produces 16.9% of the world’s GDP. The U.S. remains the most powerful economic force, military force, and its dollar is the world’s currency. The red flags are raised, though, and it is time to address the debt issue before it reaches a point of no return. Stay focused and plan accordingly.

Data Source: FactSet 05/21/2025