Updated 7 min read
Budget hawks have been warning about America's national debt since the 1980s as it grew larger than anybody ever thought possible. In 2003, when the national debt was a mere $7 trillion, Federal Reserve chair Alan Greenspan warned that deficit spending would lead to permanently higher unemployment and "potentially serious problems" as early as 2010.
It didn't happen. Presidents from Reagan in the 1980s to Biden in the 2020s bemoaned the mushrooming national debt but did essentially nothing about it — and got away with it. Despite many warnings, unemployment stayed low, global investors gobbled up unprecedented amounts of US debt, and the US economy remained the world's most dynamic.
With the national debt at $36 trillion, the bill is finally coming due, making President Trump the unlucky inheritor of a debt bomb constructed and fused by his profligate predecessors. That means Trump could be the one who has to deal with the economic problems Greenspan described, plus maybe a couple of others the maestro didn't foresee.
The Moody's rating agency catalyzed the debt problem on May 16 when it cut the US credit rating by one notch and changed its outlook from "stable" to "negative." The US has held Moody's top credit rating since the agency first issued it in 1919.
Read more: What is the US debt ceiling, and how does it impact you?
S&P Global cut the US credit rating all the way back in 2011. Fitch did the same in 2023. The problem isn't the US economy. Each agency has highlighted political dysfunction as the culprit. "Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's said in a statement on May 16.
The Moody's downgrade isn't as shocking as the S&P downgrade was in 2011, since that was the first-ever hit to the US credit rating. Some analysts point out that the US fiscal problem is well understood at this point. "There is no surprise here," Tom Lee of investing firm Fundstrat wrote on May 19. "Moody's is citing facts we already know, the sizable US deficit."
But Trump may not have the freedom of his predecessors to simply ignore the problem. What's new is that markets are finally beginning to signal that America's annual deficits are too large and the US is borrowing too much money.
After the S&P rating cut in 2011, a paradoxical thing happened: Investors plowed money into US Treasurys, the very debt instrument the agency had just downgraded. That was a traditional "flight to safety" in which investors, sensing risk, put their money into the safest place they could find, which then, as always, was US Treasurys.
