Moody's Waited Over 100 Years To Downgrade The U.S. Credit Rating, Why Now? What's It Mean For Gold?
A Moody's credit downgrade of the United States is surely a lagging indicator, but it does help to emphasize just how dire the US government's fiscal situation is.
Friday after the market close, Moody’s Ratings downgraded the U.S. government's credit rating from Aaa to Aa1, marking the first time since 1917 that the agency has removed the country from its top-tier status. This move follows earlier downgrades by Standard & Poor’s in 2011 and Fitch Ratings in 2023, leaving the U.S. without a perfect credit rating from any of the three major agencies.
The Moody’s downgrade is undoubtedly a lagging indicator, why didn’t Moody’s downgrade the U.S. last year or the year before? The deficits have been persistent and entitlement spending only goes up.
I believe there are a couple of key points that could help to explain the timing of the Moody’s downgrade, but first let’s look at some of the reasons cited by Moody’s.
Moody’s cited several factors contributing to the downgrade:
Rising Federal Debt: The national debt has reached $36 trillion, with projections estimating it could climb to 134% of GDP by 2035.
Persistent Fiscal Deficits: Annual budget deficits are expected to grow, driven by increased entitlement spending and relatively flat revenue generation.
Higher Interest Payments: Interest payments on the debt are projected to consume a larger share of government revenue, potentially reaching 30% by 2035.
Political Gridlock: Moody’s expressed concerns over the U.S. government's repeated failures to implement sustainable fiscal policies, highlighting political polarization as a barrier to effective deficit reduction.
Well there you have it, those four bullet points pretty much sum it up. I believe it is the recent deterioration in debt affordability that likely injected some urgency into Moody’s decision.
“Despite high demand for US Treasury assets, higher Treasury yields since 2021 have contributed to a decline in debt affordability. Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021. The US general government interest burden, which takes into account federal, state and local debt, absorbed 12% of revenue in 2024, compared to 1.6% for Aaa-rated sovereigns.
While we recognize the US' significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.”
Those numbers are sobering.
Moody’s was the final holdout among the big three credit rating agencies. I’m sure this decision wasn’t taken lightly, but it was impossible to ignore rising entitlement spending, rising Treasury interest payments, and zero credible plan to increase government revenue.
So far, the Fed isn’t cutting rates in 2025 and the U.S. 10-Year Treasury Yield remains stubbornly north of 4.40% - this means that the U.S. Treasury is on track for US$1.5 trillion in interest payments in 2025:
Contrast that $1.5 trillion in interest payments against $5 trillion in total U.S. government revenue and we are already getting close to that 30% level.
Treasury Secretary Scott Bessent knows that this is an untenable situation. Bessent was making the media rounds Sunday morning and he dropped the following nugget:
“We are going to grow the GDP faster than the debt grows and that will stabilize the debt/GDP.”
The only way out of this debt trap the U.S. finds itself in is via inflation and financial repression. For those who are paying attention, Bessent is making it clear that US Treasury debt holders are about to get financially repressed (nominal yields < inflation).
Trump 2.0 wants to supercharge the US economy and grow its way out of its currently untenable debt burden. After all, growth is the only way to extend and prolong a Ponzi.
What does this mean for relatively scarce and sought-after financial assets like bitcoin and gold?
It means that the future is bright for assets that perform well during periods of financial repression and sovereign debt restructuring; monetary alternatives like gold and bitcoin are finding themselves in a sweet spot in Year 1 of Trump 2.0.
Bitcoin (Daily)
We know that the Trump Administration has a plan for how they would like to restructure the US and global economy. They are completing a series of necessary tasks in a specific order. Trade deals and implementation of tariffs on abusive trading partners were deemed to be among the first priorities. However, once trade deals start being finalized, I expect that currency revaluations and the implementation of a new trade settlement mechanism (potentially involving gold and/or bitcoin) will be next on the agenda.
After four years in which nobody could have cared less about gold (2021-2024), it’s not an accident that at the very end of 2024 (after the U.S. election) suddenly many investors started to care a great deal about gold:
The US gold buying & gold imports of 2025 will be a great story to be told one day. However, much of this surge in gold buying is still shrouded in secrecy. Meanwhile, China’s gold buying has continued to be voracious since mid-2022. In fact, there is evidence to suggest Chinese gold buying has also accelerated in 2025:
Some major regulatory changes in China have already had a big impact on the gold market. These changes include a government directive that mandates Chinese insurance companies to invest at least 1% of their assets into physical gold over a three-year period.
Chinese life insurers have begun investing in gold as part of a significant policy shift initiated in early 2025. This move is part of a broader strategy by China to diversify its financial assets and reduce reliance on U.S. dollar-denominated holdings.
China sees where the puck is going and they have gradually steered more of the country’s savings into gold. Meanwhile, US domestic holders are sitting with more than US$20 trillion of the U.S. Treasury’s debt. With Treasury Secretary Bessent openly informing Treasury debt holders that they are about to be financially repressed, we should be thinking about where some of that $20 trillion might flee to over the coming years.
Gold stands to be a big beneficiary, with silver poised to be an underrated potential beneficiary.
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