Sometimes, Life's a Fitch

WARREN WARD |
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I wrote an article a few weeks ago in which I expressed hope that the debt ceiling crisis (remember that one?) would be out of the headlines before long. I feared that the repeated posturing of our legislators without taking action could lead to a lack of confidence in the US dollar, threatening its position as the world’s Reserve Currency. I got my wish regarding the headlines but only because another last-ditch, band aid solution was passed by Congress. Unfortunately, subsequent headlines have proved to be even more distressing.  

This week, the Fitch Ratings service lowered the credit rating of the United States government. In doing so, they cited several factors including: 

  • “A steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters…” 

  • “Eroded confidence in fiscal management…” 

Such a downgrade does not have an immediate effect – it won’t force the country into bankruptcy. But just like your personal credit rating, higher is better and any downgrade is cause for concern among potential lenders (ie, buyers of government-issued debt). Reduced ratings are likely to increase borrowing costs for the government, just as they would for an individual. The most significant buyers of our bonds are other governments, especially Japan, with whom we seem to enjoy generally good relations and China, with whom our relations are generally strained. The only way our government can continue to spend more than it takes in is through continued borrowing from other countries. Anything that makes that more difficult has the potential to cause problems in the future. 

This is exactly the sort of topic that Congress wants out of the headlines, so does it respond by returning to more civil discourse and working towards solutions? No, it gets out ahead by creating a new headline-grabbing activity: a Congressional investigation of Unidentified Flying Objects – now known as UAPs. Senior military officers were required to testify before Congress on this topic, thereby guaranteeing the desired outcome. Media coverage focused on little green men and the credit downgrade became old news. 

Even though Congress managed to shift the headlines, planners (really all investors) must deal with realities. We plan for a range of outcomes, then make adjustments as they become necessary. For example, our investment accounts have been underweight bonds for many years, since we didn’t see how our clients would be helped by locking in interest rates significantly lower than the rate of inflation. With the Federal Reserve raising interest rates, and the incremental premiums being asked for by bond buyers due to the downgrade, we have been able to increase bond holdings. It is our intention that these changes will offer a less volatile financial future for our clients. 

As I said in my previous message, the erosion of the ‘full faith and credit’ of the US government is likely to be a long, slow process. I certainly hope it is not inevitable. Regardless, we will continue to monitor the markets and make adjustments as we find necessary. We’re always happy to hear from you if you have questions.