The Costly Consequences of America's Credit Downgrade

Fitch Ratings has downgraded the creditworthiness of the US government from AAA to AA+ due to the increasing size of US indebtedness and an "erosion of governance." The downgrade could have long-term implications for US economic growth and borrowing costs. The US Treasury currently owes $32.6 trillion, and if investors perceive US Treasury bonds as riskier, they may demand higher interest rates or become less interested in buying them, resulting in higher borrowing costs for the government. The federal government has limited options to cover its growing borrowing costs, including borrowing more money, hiking tax rates, or cutting spending, all of which have political consequences. Higher government debt is generally associated with lower long-term economic growth.