Assessing the U.S. Economy and Market Trends
Experts Kenny Polcari of SlateStone Wealth and Eddie Ghabour, CEO of Key Advisors Wealth Management, offer insights on the current state of the economy and discuss whether it’s advisable to buy market dips.
Moody’s Downgrades U.S. Credit Rating: A Critical Perspective
As a keen observer of economic trends, I express concern about burgeoning government spending and debt. Yet, my attention is drawn to Moody’s recent U.S. credit rating downgrade. I question if the agency’s judgment can be trusted, given its track record.
Moody’s Controversial History
It’s worth reminding ourselves that Moody’s was the agency that assigned top credit ratings to subprime mortgage-backed securities up until the eve of the major financial crisis. This led to a devastating loss of trillions of dollars of investor wealth.
The National Bureau of Economic Research highlights Moody’s involvement in the crisis: “In 2007 and 2008, a significant deterioration of creditworthiness of structured finance securities was observed. Moody’s downgraded 36,346 rated tranches, and nearly a third of these bore the AAA rating.”
Moody’s Penalty for Faulty Ratings
Following its controversial role in the crisis, in 2017, Moody’s agreed to pay a $864 million penalty for its flawed ratings. And yet, shortly after, Moody’s downgraded the U.S. credit rating citing rising debt. The question then arises: can Moody’s justifiably assess anyone’s credit worthiness?
Accusations of Political Bias
Moody’s has been accused of political bias. Despite the significant budget impact of President Joe Biden’s $5 trillion spending spree, the agency failed to issue a credit downgrade during his term. Now, with Donald Trump as president, the agency seems to have changed its stance.
Moody’s vs. Tax Cuts
Moody’s chief economist regularly criticizes supply-side tax cuts while praising government spending as an economic stimulus. Yet, the agency fails to appreciate how tax cuts, like those of Ronald Reagan in 1981 and Trump’s 2017 bill, can stimulate economic growth and lower the debt burden long-term. If growth rate reaches 3%, as Trump aims for, the debt burden would start to shrink.
The Timing of Moody’s Downgrade
The timing of Moody’s downgrade is questionable, coinciding with Congress’ vote on the Trump tax cut. Investors continue to commit to significant new investment capital in the U.S., suggesting a level of confidence at odds with Moody’s downgrade. Perhaps they see what Moody’s fails to: Trumponomics is good for the U.S. economy and for those who invest in it.
Stephen Moore is a co-founder of Unleash Prosperity and a former Trump senior economic advisor.
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